In the fall of 2021, 39-year-old Krista Lehman quit her job as a program assistant at a Vancouver post-secondary institution to take a mental-health break and pursue other career options.
When it came to her defined benefit pension plan, her employer’s human resources department provided her with a package that offered her the choice of taking the commuted value of her pension — a lump sum based on a calculation of what the future pension is worth now — or keeping the money in her pension plan until 2047, when she would start receiving monthly payments.
“I was shocked at how much money I had,” she said. “I had never had this amount of money in my bank account before.”
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For millennials who haven’t yet had a chance to invest outside of mandatory employee pension contributions, figuring out what to do with a pension plan after leaving a job can be daunting. In Lehman’s case, she felt having autonomy over how to invest her money was more attractive than leaving it with her former employer.
“I wanted to be more of an active participant in my savings and in my retirement planning than I had in the past, so this felt like an opportunity to do that,” she said. “I also wanted to make ethical decisions about where my money sits.”
Lehman took the full commuted value, putting nearly 50 per cent in a locked-in retirement account, approximately 33 per cent in a registered retirement savings account and cashed out the other 17 per cent to handle current expenses.
Each employee will get their own set of choices when they leave a job and those choices will differ even further depending on whether they have a DB plan or a defined contribution plan, said Liz Schieck, certified financial planner at the New School of Finance in Toronto.
Deciding what exactly to do with a pension can be overwhelming, she added, which is why she recommends individuals take some time to think it through and seek the advice of an unbiased financial planner if possible.
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When it comes to DB plans, Schieck sees people most commonly decide between leaving the pension with their employer, transferring it to their new employer’s pension plan or taking the pension and investing it elsewhere. In this situation, it comes down to confidence and comfort levels. “Some individuals might feel more averse to investing it in the market themselves, while others might feel less confidence in a pension.”
In the latter case, those in their 20s and 30s might not feel confident that a company is going to continue to exist when they retire and throughout that retirement. For those who decide to take the pension with them, putting that money into a LIRA and any remaining money into an RRSP if they have available room, means that it won’t count as taxable income. However, if an individual doesn’t put remaining funds, outside of a LIRA, into an RRSP, they’ll get a check and that money will be taxed, said Schieck.
But the decision of whether to put it in an RRSP or take the tax hit isn’t one size fits all, she added. “It depends on what tax rate you’re going to pay, what tax bracket you’re in, what debt you have, what’s the interest rate on and what other savings capacity you will have going forward. This is why it’s great to get advice.”
When it comes to a DC plan, the decision can sometimes be simpler because there are fewer choices. The DC plan already acts as an investment account, said Schieck, noting here’s a set amount of money that an individual can either keep in the plan or invest in a locked-in account elsewhere. There’s also an option to buy an annuity, but they’re a much less popular route.
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When quitting a job with a DC plan, the decision about whether to take the pension is dependent upon what products an individual wants to invest in and where, she said. For example, those who take the pension with them might feel more comfortable keeping their investments at their own bank or want to be more selective about their investments, like Lehman, who wanted to ensure her investments are ethical.