With the labor shortage, changing jobs has almost become child’s play. But when it comes time to leave, workers on a defined benefit plan must make an informed adult decision. Is it better to wait for the annuity or to resume its marbles?
Financial experts are advising a growing number of workers who are hesitating between egg and chicken when it comes to quitting a job. With good reason, because it is not always easy to make such a decision.
Fortunately, the answer lies in large part in the analysis of a key document: the statement of end of active participation. Provided you know how to do the calculations and accept that there are gray areas.
Captain Carole-Anne Dufour must make this choice. She is leaving the Canadian Armed Forces after 12 years of service. There she benefited from a defined benefit (DB) pension plan. The amount of his guaranteed pension is therefore known, which is not the case with defined contribution (DC) plans.
“In the long term, I have a hard time figuring out what would be the best option for me,” writes the one who can earn $ 1,861 at age 60, then $ 1,493 at age 65 (in today’s dollars ). Its generous indexed plan compensates for the presumed absence of a QPP pension from age 60 to 65.
As for the actuarial value of $ 360,978, less than half can be transferred without tax impact to a locked-in RRSP, the federal equivalent of the locked-in retirement account (LIRA) in Quebec. The transferable amount is limited since you cannot put money endlessly in an RRSP.
The remainder of the transfer value must therefore be subject to tax. And we’re talking about $ 200,000 here, roughly speaking. “This amount will be added to her salary and she will lose half of it. Often, people don’t understand that, ”reports financial planner André Lacasse, of Services financiers Lacasse.
PHOTO MARTIN CHAMBERLAND, THE PRESS
André Lacasse, financial planner at Services financiers Lacasse
The only way to get around this drain would be to transfer the amount to an RRSP, but you still need to have space, which is not the case for Carole-Anne and many beneficiaries of a DB plan.
Once the true transfer amount has been established, you have to determine what the rate of return will be necessary to obtain the same pension as that promised by your DB plan. An exercise that Lucie Gervais, Director General, Tax and Estate Planning, at IG Wealth Management, agreed to do with Carole-Anne’s data and two ages for demonstration purposes. She also calculated her chances of success.
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Before revealing the purely mathematical conclusions, let’s list the other questions to ask.
“The first is: what is the plan’s solvency rate? », Indicates André Lacasse. If you benefit from a government plan like RREGOP, you don’t worry about it. But in the private sector, it is.
Businesses are required to fill the gaps, but not all are strong backers. We must therefore question their life expectancy. In the event of bankruptcy, the pension may be cut.
You also have to take your own life expectancy into consideration. “People don’t realize that they can live to be 100 years old,” notes André Lacasse. The advantage of the annuity is that it is guaranteed until death, while you can outlive your savings. Those who are interested in the stock market will reply that they are capable of outperforming their pension plan. “A lot of people believe they can make tremendous returns. Especially stock marketers, ”observes the expert, recalling that it is far from simple and guaranteed.
Obviously, the younger you are, the more likely you are to “beat” the performance of your pension plan and to recover in the event of a sharp drop in the markets. His age is therefore an important factor in the equation (see the scenarios in the table below).
Is the plan indexed? If so, it is worth the gold. “It’s hard to beat,” says Lucie Gervais.
Another element to consider is his romantic situation. An annuity will generally be reversible to the spouse at 60% (sometimes more), while the estate will not touch a penny after the guarantee period. Do you have a spouse, do you think you will have one after 65, what will their financial needs be? Money transferred to a locked-in RRSP or LIRA will go to the estate. Please note, the definition of spouse is different depending on whether it is a federal or provincial DB plan.
PHOTO PROVIDED BY LUCIE GERVAIS
Lucie Gervais, General Manager, Tax and Estate Planning, at IG Wealth Management
The advantage of the annuity is that it is worry free. We have no investment choice to make, worries about fluctuations in stock market indices. “If we no longer live and we are too stressed, we are no further ahead,” says Lucie Gervais, while adding that it takes good financial discipline to take the actuarial value.
Let us now return to the case of Carole-Anne. As we can see in the table below, his chances of “beating” his generous plan which will give him a pension without penalty from the age of 60 are very slim. Unless she’s 32 and has a high tolerance for risk.