In the fall of 2021, 39-year-old Krista Lehman quit her job as a program assistant at a post-secondary institution in Vancouver to take a break to deal with her mental health and consider other career options. .
Posted at 10:44 a.m.
When it came time to take care of his defined benefit pension plan, his employer’s human resources department presented him with a package that offered him the option of taking the present value of his pension — a lump sum that relies on a calculation of the present value of the future pension — or that of keeping the money in her retirement plan until 2047, when she will start receiving monthly payments.
“I was stunned to see how much money I had,” said Ms.me Lehman. I had never had this amount of money in my bank account before. »
For millennials who haven’t yet had the chance to invest outside of mandatory employee pension contributions, it can be daunting to know what to do with a retirement plan when leaving a job.
In the case of M.me Lehman, she felt that having autonomy over how to invest her money was more appealing than leaving it to her former employer.
“I wanted to be more actively involved in my savings and retirement planning than in the past, so this was an opportunity to do that,” she noted. I also wanted to make ethical decisions about investing my money. »
Mme So Lehman took the full cash value, putting nearly 50% in a locked-in retirement account (LIRA), about 33% in a registered retirement savings account, and cashing in the remaining 17% to manage day-to-day expenses, such as a new computer.
Every employee is left with their own set of choices when they leave a job, and those choices differ depending on whether a worker has a defined benefit pension plan or a defined contribution plan, pointed out Liz Schieck, certified financial planner at the New School of Finance in Toronto.
Deciding what exactly to do with a pension can be daunting, Ms.me Schieck, which is why she recommends that her clients take the time to think things through and seek the advice of an unbiased financial planner if possible.
Different options
For defined benefit pension plans, Mme Schieck sees his clients most often choosing between leaving the pension amount with their employer, transferring it to their new employer’s pension plan, or taking it and investing it elsewhere.
The decision often depends on the level of confidence and comfort. “Some people might feel more reluctant to invest (the amount) themselves in the market, while others might have less confidence in a pension plan,” Ms.me Schick.
In the latter case, some people in their 20s and 30s might not be convinced that the business will still exist when they retire and throughout their retirement.
For those who decide to withdraw the pension amount, placing that money in a LIRA, and any remaining money in a Registered Retirement Savings Plan (RRSP) if the ceiling permits, ensures that the amount is not considered taxable income. However, people who choose not to put the remaining amounts in an RRSP will receive a check and this money will be taxed, explained Ms.me Schick.
For someone burdened with student debt, this money could make a big difference in helping pay it off.
But the decision to put the amount into an RRSP or use it by paying the appropriate taxes isn’t universal, Ms.me Schick.
“It depends on the tax rate that is going to be paid, the tax bracket you are in, the accumulated debt, the interest rate and the ability to save in the future. This is why it is good to be advised. »
When it comes to a defined contribution plan, the decision can sometimes be simpler, since there are fewer options. The defined contribution plan already acts as an investment account, Ms.me Schick. There is a fixed amount of money that one can either keep in the plan or invest in a locked-in account elsewhere. There is also an option to purchase an annuity, but this is a much less traveled route.
When leaving a job with a defined contribution plan, the decision to withdraw the pension or not depends on the products in which one wishes to invest, and the location, explained Ms.me Shieck.
For example, those retiring might feel more comfortable keeping their investments in their own bank or wanting to be more selective about their investments, like Mme Lehman, who wanted to make sure his investments were ethical.