Generally, people who have a retirement plan from their employer, even more so when it is a defined benefit plan, do not ask themselves too many questions about their retirement. But it is sometimes possible to ask to take out your money accumulated in your pension fund to manage it yourself. Is this an advantageous choice? This is what Rodrigo* asks himself.
The situation
Arriving in Canada in 2006, Rodrigo is in his mid-40s and has worked at Hydro-Québec for 15 years. He and his partner would like to stop working within ten years. They have two children. Rodrigo benefits from a pension fund which would allow him to retire without penalty at age 57.
However, he is thinking of asking his employer to withdraw the amount accumulated for him rather than taking his pension for the rest of his life. Upon his death, his spouse would only have 60% of his pension.
“If I take the money, I will have to manage this amount myself, but when I die, I will be able to leave the rest to my partner and our children,” explains Rodrigo. I feel like I would be penalizing my family by taking the pension. »
Rodrigo discussed this choice with colleagues. “People who make this decision are rare as snow in July: everyone thinks I’m a little crazy! I would like to know if my choice seems to you to be the best for our family. »
The financial portrait
Gross family salary: between $270,000 and $300,000
Value of family home: $750,000 ($264,000 mortgage)
Value of pension fund, RRSPs, TFSAs and family RESP: 1.1 million
The advice
Hadi Ajab, independent financial planner and collective savings representative attached to PEAK Investment Services, first highlights the importance of Rodrigo’s thinking.
“Everyone who has a pension fund should ask themselves this question, because to carry out good retirement planning, you must not exclude options from the outset,” he says. And even if no one does, that doesn’t mean you have to follow the parade. This is an important decision that must be studied seriously because it will have impacts on a long period of the life of the person and their family. »
Analyze your pension fund
To be able to make an informed decision, you must start by analyzing the pension fund. The first thing to do, according to Hadi Ajab, is to check if it is possible to transfer your money into a locked-in plan and if so, under what conditions. In the case of Hydro-Québec, it is possible with certain requirements.
Then, you have to check the characteristics of the pension fund to see how advantageous it is or not.
PHOTO MARTIN TREMBLAY, LA PRESSE ARCHIVES
Hadi Ajab, independent financial planner and collective savings representative attached to PEAK Investment Services
“First, it is interesting to note that permanent Hydro-Québec employees join the plan from their first day of work, whereas in other organizations, it is after six months or even two years,” explains the financial planner.
Second point: it is a defined benefit plan, that is to say that the amount of the annuity is guaranteed, regardless of the returns. The person provides 50% of the required contribution for the year from their salary and the employer takes care of the other 50%, in addition to any deficit.
Third, there is the financial health of the organization and that of the pension fund. “As every month, the state corporation fills the actuarial deficit if there is one, the solidity of the pension fund is assured,” says the financial planner. The promised pensions can be paid and all the risk is on the employer. Furthermore, we are not afraid that Hydro-Québec will go into disarray like Sears or Nortel did. »
As a fourth point, there is the calculation of the annuity. Hydro-Québec takes into account the person’s number of years of participation, their age and their best five years of salary. “This is an interesting feature for the worker who decides to slow down at the end of their career,” explains Hadi Ajab.
In addition, normally, the employed person is entitled to their full pension at age 65, but Hydro-Québec offers a temporary bridge pension if they decide to retire before.
Finally, if Rodrigo says that he can have his full pension at 57, it is because Hydro-Québec offers another advantage. From 15 years of participation in the pension fund, if we add the person’s age to their years of experience at Hydro-Québec and we obtain 85 or more, the person can retire without penalty.
“I deduce that Rodrigo is 44 years old and that when he is 57, he will have 28 years of experience, which gives 85,” calculates Hadi Ajab. This is a significant advantage. Thus, Rodrigo can gain eight years of full retirement. It takes well. »
Finally, there is indexing. “At Hydro-Québec, it largely reflects inflation, which is not the case for many pension funds,” notes the financial planner.
For all these reasons, he believes that the Hydro-Québec pension plan is very generous when compared to others.
Analyze your situation
After analyzing the pension fund, it is necessary to analyze the person’s situation. The first thing to look at, according to Hadi Ajab, is to what extent Rodrigo will need his pension to live. “It’s not very clear in the information he gave us, but it’s certain that if the largest portion of his retirement income comes from this pension, it’s a big element that tilts the balances on the income side, he says. If he has to disburse good amounts every month, why take the risk yourself when someone else can do it? »
On the other hand, he indicates that if Rodrigo and his partner can draw their income elsewhere and not touch the amount obtained until age 72, the age at which they will be obliged to begin withdrawals, this could tip the balance in favor of the transfer .
However, by transferring the money into a locked-in plan, Rodrigo will have to manage his investments. “He will have to take care of making this sum profitable, then he must have a fairly high risk tolerance to hope to make a good return,” explains Hadi Ajab. And it’s difficult to do better than an indexed annuity for life. Then, you must plan the disbursement with great caution once you have transferred your locked-in plan to a life income fund. »
In terms of taxation, we must also think about income splitting. “With an annuity, you can split your income with that of your spouse before age 65, but with a life income fund, it is only possible from age 65,” explains financial planner Hadi Ajab. For a couple with a big difference in income, this can be expensive in taxes, so it should be considered. »
You must also check if he will receive an amount beyond the maximum transferable in a locked-in plan and if this is the case, if he has the necessary space in his registered retirement savings plan to send the difference there. . “Otherwise, Rodrigo risks having to pay a lot of tax at once,” says the financial planner.
Life expectancy must also be assessed. “It is certain that if Rodrigo has reason to believe that he will not live long, for example if he is in poor health or if his parents died young, this could encourage him to transfer the money to a immobilized plan to ensure that his estate can benefit from the full amount, assesses Hadi Ajab. But, if he is healthy at 57, he should realize that he could spend more than 35 years in retirement. »
Finally, Rodrigo must find out if there are any benefits that Hydro-Québec gives to its retirees, for example regarding drug and life insurance.
After analyzing all these elements, Rodrigo will be able to make an informed decision. “I believe that the simplest option is to take the pension which is very generous,” assesses Hadi Ajab. But, if Rodrigo decides to give it up after doing all this analysis, he will know exactly why and he will be able to do things correctly. »
* Although the case highlighted in this section is real, the first name used is fictitious.