5 Common Pension Questions We Receive

Are pensions guaranteed?

They should be, but that is not the case for all pensions.

A defined benefit pension plan is one in which you receive a regular payment - typically monthly, in retirement. Your benefit after retirement might be based on several factors including years of service and your salary (either your ending salary or an average over a certain number of years [ie. your best 5 years]).  You would know if you have a defined benefit pension plan as the monthly lifetime income you can expect is given to you on an annual pension statement and you don't make any investment decisions regarding the pension.  The pension plan invest it's assets according to the plan administrator.  The onus is on the employer to top up the pension if there are poor investment returns.  If the pension plan is underfunded, the employer should top up the plan; however, if the employer has cash flow issues or is close to bankruptcy, it is possible that your lifetime pension amount could be reduced.  This information is provided to the pension participants and is known as the solvency ratio.

Alternatively, you may have a defined contribution plan, one in which you make contributions to your retirement account. Usually your contributions are invested either into a preselected target date fund, or you may be able to choose from a list of exchange traded funds or mutual funds. Instead what you end up getting during retirement depends on how much you put in and how the market performs over time. Employers can also make contributions to your defined contribution plan, often in the form of matched contributions.

The main difference between defined benefits and defined contributions is who is primarily responsible for your retirement income; your employer or you. 

Can I take my pension and keep working?

For some employers, it is possible to start your pension and return to work. Often employees who select this option with the same employer, return as consultants; therefore, they will not continue to grow their pensions in the future. Instead of pension increases and employee benefits, a higher hourly wage is offered to offset the loss of the benefits.

Taking your pension and returning to work in another occupation, is also a possibility. Perhaps you are retiring from work as a nurse but want to follow a passion for working as a florist.  Here you would take your pension and earn additional income in your 'retirement job.' Talk to a Financial Advisor to optimize taxation in this scenario.

Are there any other options for my pension other than what my employer sends me?

There are other options that can offer flexibility and peace of mind. Here are a few samples of ways we personalized a pension plan using outside sources:

Commuting the value of a pension into a Life Income Fund gives the retiree control of the investments and income from the pension. This option is helpful to create tax efficiency, as income can increase or lower depending on needs, to certain maximums and minimums. Secondly, if the retiree does not have a spouse, has health concerns and/or has dependents, this allows the pension to be inherited by someone other than a spouse.

Depending on the make up of the pension group (ie. gender, age, etc.), it may be beneficial to look at alternative options for guaranteed years of receiving pension funds. For pension options that guarantee pension income for a set number of years, we consider the drop in value that would be received as an insurance payment. In some cases, the value of the pension decrease could be used to finance a third party life insurance contract that may be less expensive or a higher payout for longer than offered through the pension options. For example, if the difference between a 5 year guarantee and a 15 year guarantee is $188/month, the retiree may qualify for a $250,000 term insurance which costs $188/month.* This insures the value received is higher for the same duration.

A copy cat annuity is an option for those that are concerned with the solvency of their employer. In this option, the value of the pension is commuted it to a third party life insurance provider (ie. Sun Life, Canada Life, BMO Insurance, etc.). Depending on the situation, it is possible that some cash is freed up during this transfer.  Another value of this option is that with the pension being moved to a third party life insurance company, there is coverage on the monthly benefit from Assuris for up to $5,000/month or 90% of the amount, whatever is higher.

Both my spouse and I have employer pensions. Should we both take the same pension option?

It truly depends on your situation.

As a rule of thumb, some key variables that lead to the suggestion of opting for a joint life pension are: close age disparity, tight cash flow, limited investable assets, personal peace of mind, etc.

Key variables that lead to a suggestion of opting for a single life pension are: spouse's declining health, dependent children relying on income, longevity in the family of one spouse but not the other, healthy lifestyle of one spouse but not the other, etc.

I split from my common-law spouse/partner, they had a pension. What are the martial distribution rules for pensions?

In our experience, often people view the pension as an earned compensation due to the person working for it and have opted to disregard the pension as an asset in separation discussions. Marital law in BC views it differently. Just as a marital home is a marital asset, a pension is a marital asset.  This means that for the duration of your common-law/marital relationship, the amount earned in the pension is a joint asset. It is up to the leaving party to negotiate for either a split portion of the pension or to request similar value of compensation in another form (ie. investments, cash, equity in a property, etc.) when terminating a relationship.  Although it may seem small, the present value of pensions, may be more than you think. (ie. $1,740/month benefit starting at age 62 can be worth $417,965**)

Navigating pension decisions are nuances. Once you select to take your pension, there are usually no changes that can be made. Reach out to a Financial Advisor to inform, collaborate and recommend which options are suited to your situation. 

Written by: Charissa Keech, BA, PFA, CFP

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*Quoted using Canada Life illustration on August 8th, 2024 for a age 65 female with standard health

**Quoted using Cannex from Canada Life July 30, 2024. Quoted a female with bridge of $2,599/mth until age 65.

The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any Federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel. Neither the information presented nor any opinion expressed constitutes a representation by us of a specific investment or the purchase or sale of any securities. Asset allocation and diversification do not ensure a profit or protect against loss in declining markets.