Are you familiar with your employee’s benefits?
And especially if you are working with
the government or the big companies,
Do you understand
what kind of retirement plan you have?
Over 4.3 million Canadians were covered by
a defined benefit pension plan in 2019.
And if you are part of 4.3 million,
do you know what you get upon retirement?
In this video
I’m going to help you understand more
about your company pension plan
For example,
what affects your pension benefits,
will your spouse or your beneficiary able to
keep your pension plan if you pass away.
Or what happens if you quit your job,
can you move your pension over.
I will go over all the questions above
So you know exactly how that
contributes to your overall retirement plan
Hey! Welcome back
This is Thomas
Here to help Canadians make better choices
On Retirement Wealth and Insurance
My goal is to make sure you take home 1 or 2 ideas
And start making better financial decisions today
If you found this video valuable
Please consider subscribing
so you will never miss any of my videos
Now let’s get started!
In Canada,
there are two types of
employers sponsored pension plans
First one we have the
defined contribution pension plan
This plan is where you know
how much you pay into the plan,
you have a freedom of choice
on where you invest but,
but the result is not guaranteed.
Compare to the other one,
the defined benefits pension plan
which is what we focused today.
As the name suggested,
you pension paid out is guaranteed.
You know exactly how much you going
to get per month during your retirement.
Now how does it work?
Well, most of the time you and your
employer will contribute to the plan together.
And the pension plan administrator
invests and manages the fund.
The longer you stay in the company
and the higher income you are,
the higher the pension payout.
And even though you don’t have a say
where you want to invest this money,
No matter the market goes up
or down in the next 30 years.
You are guaranteed with a fixed retirement payout.
And that’s why,
when I was young,
my parents always wanted me to work
with big corporations or the government.
Anyway,
there are a few flags to be aware of when
you have a defined benefit pension plan.
First of all,
most of these plans are not indexed payout.
An indexed plan is where the amount
you get may increase on a regular basis
With the intention to help you cover your living
expenses when the overall cost of living increases
But as I said,
only a handful of pension plans are indexed.
So if you are planning to retire early
then you need to make sure
you don’t just rely on this income source.
And speaking early retirement,
the earliest you can access
the pension package is at age 55.
and if you do retire between 55 years old
and 65 years old,
in addition to your pension income,
You will receive a bridge benefit that is payable
from your early retirement date until 65.
Because by age 65,
you should be receiving cpp and oas as well.
So again,
if you choose to start withdrawing at age 55,
you will get a bit more,
then by age 65,
the pension payout will be reduced.
There is a whole bunch of calculation to calculate
the bridge benefits and the actual amount you get.
But I think the easier way is
to talk to the HR department.
And usually by 54,
they will send you a statement to give you an update.
Let’s talk about what happens when you choose to retire,
it depends on your provider,
but normally you have two options for your benefits.
You can opt for a single person pay out
Or you can opt for a joint payment
With a single person payout,
the plan only pays you and you only.
meaning if you pass away,
Unfortunately your spouse would not get any payments,
all the money is left over will go back to the plan.
With a joint payment on the other hand
You will get less retirement payout,
but your spouse will be entitled to
get your benefit when you pass away
The less you get for your pension payout,
the more benefits your spouse get when you pass away.
And here is an example,
Say John works in a bank for many years.
And now he wants to retire.
In the pension packages,
he has couple options
If he is single,
he has two choices
Option A) payable to John only for John’s life,
but in the event of John’s death,
his pension payment will cease.
Or Option B) payable to John for 10 years,
if John passes away within those 10 years,
the remaining will pay to john’s beneficiaries.
but if john is still alive after 10 years,
the pension payment will be reduced.
Now what if John is married,
then he has another 2 choices
First option,
he gets 100% of the benefits,
but if he passes away,
the surviving spouse get 50% of the payout.
Second option,
he gets 90%, and spouse get 90% as well.
Notice that in these scenarios,
if both john and the spouse pass away,
or if the spouse passes away first.
Then all the remaining benefits will
go back to the plan.
This is extremely important and make sure
you triple check your pension package
as each carrier has different terms.
Now you may ask
What happens if I quit the company?
If you quit, there are a couple of options
You can choose to leave the plan there and let it grow.
You don’t touch it until
the day you retire and get a payout by then.
However,
usually the payout will be extremely small.
Or you can also transfer it to a new pension plan
but only if the new company has pension plan as well.
Or the last option is you can transfer it
to your own LIRA
Which is a locked in registered account
As the name suggested,
this account is lock in and you cannot touch this
until you reach age 55 or unless you are in
a financial hardship or severe disability.
Once you switched to a LIRA account,
you have the ability to choose your own investment.
So therefore,
if plan and done right,
you should have a higher return compare to
a traditional pension plan.
And also, for most of the LIRA account,
you can name a beneficiary which means for sure
your hard-earned money will only stay within your family.
But let’s talk about the downside of a LIRA account,
similar to RRSP and RRIF,
By age 71,
you need to convert to LIF account,
short for Life Income Fund.
And the biggest difference between LIF and RRSP,
where RRSP or RRIF you can choose to
take the whole amount out if you want to
versus for LIRA / LIF,
it has a maximum annual withdrawal limited
based on the province you are in.
so say if you have a medical emergency
and you need money,
you cannot take more from the LIF account.
lastly,
since you choose your own investment vehicle in LIRA,
then you are responsible for your own risk.
And something to keep in mind
about pension transfer to LIRA.
It’s not a complete dollar to dollar transfer
like tfsa/rrsp transfer where there is no tax implication.
If you do want to initiate the transfer,
usually the pension provider will let you
transfer 80% to 90% into your LIRA.
And the remaining 10 – 20% will be
pay to you in cash and that will be count
towards your income for that year.
Sometimes this is a good way,
because now you can access some of
the money to pay off debt or invest in other area.
And if you have enough RRSP room,
you can put that cash in there to fully offset it.
Lastly, what happens to my pension plan
if I die before retirement?
If you were not eligible to retire at the time of death,
Then your spouse will be entitled to the
commuted value of your retirement income
Which is a lump sum of
the present value of benefits accrued
But they would have the following options:
They can transfer it to their pension plan of their employer,
but only if the employer agrees to accept it
Or they can transfer to a locked-in RRSP or similar plan
As I mentioned before,
all these Plans vary by employers
So it’s important to go over your benefit package again
and also speak to HR should you have further questions
Or if you just quite your job,
and you still have a rrsp or a pension plan with your
previous employer and not sure want to do with it
Let’s have a chat!
There’s a link below for you to book a
complimentary consultation with my team and I.
We can review your plans to see if they’re on track
and what’s the best option for you!
Anyway,
I hope this video has provided you with an overview
of how typically a defined benefit pension plan works
And if you like this kind of content,
please leave me a comment and
give this video a thumbs up.
It helps with the YouTube algorithm
to promote to more people.
This is Thomas!
I will see you in the next video!