30 Dec Should I Transfer my Pension or not?
While speaking with a client today I was asked the following question…
“My wife has recently changed employers and we are eligible to transfer her pension or leave it as is. What should we do?”
- This question often arises as more and more Canadians continue to adapt to the rapidly changing workforce. Individuals today secure many different positions throughout their career with several different companies. Very seldom do you see someone endure a lifelong career with the same company for a long period of time.
- Each of these job changes present the opportunity to decide upon whether existing pension assets should be left with the previous employer or transfer them to a self-managed investment account.
Let’s discuss the various reasons it would be considered advisable to transfer a Defined Benefit pension to an externally self-managed investment account:
- ENHANCED COMMUTED VALUE:
The total amount of money to be transferred, also known as the commuted value, in today’s market environment is artificially high due to low interest rates. You see, the defined benefit income projections are a result of prospective interest rates. The higher the interest rates the lower the amount of capital that is required to provide a prescribed amount of income. Alternatively, today’s extremely low interest rate environment supports a compelling reason to consider taking the commuted value. The value eligible to transfer would be now inflated in comparison to previous interest rate environments of the past.
- CONTROL OVER ASSETS:
Many Canadians may actually feel more confident in either managing their transferred pension themselves or perhaps in combination with a financial professional. There are many advantages to this option. An investor can control the amount of risk that they are able to take with the assets as well as the nature of the investments themselves.
It is also important to note that the majority of pensions throughout the world today are operating under immense deficits and are eventually going to be forced into reform and possibly bankruptcy. This for obvious reasons would not bode well for Canadians as the value of their pension benefits would most certainly be affected.
- MAXIMIZING THE BENEFIT TO YOUR ESTATE & BENEFICIARIES:
Very often defined benefit pension plans provide the following caveats. Upon death of the employee, the surviving spouse shall receive a reduced amount, often around 60% of the benefit otherwise paid to the employee. The more unfortunate aspect of this is that in almost all cases, upon the death of the surviving spouse, zero is eligible to be transferred down the next generation. This is quite often an unacceptable outcome for most clients and usually the most significant reason to consider an external transfer.
- BETTER CONTROL OVER FEES:
Cost are a part of business and life. However, by choosing to transfer the funds out of the existing defined benefit pension, and investor has a significantly higher control over the amount of fees they are subject to when managing their assets. Because inside the pension it is obviously completely out of their control.
- FLEXIBILITY OF FUTURE INCOME STREAMS:
With defined benefit pensions the income stream that one would otherwise receive in retirement, is static without any flexibility whatsoever. This is not beneficial for our clients as they prefer to have control over how and when they receive their income in retirement. If income should not be required for a brief period of time, then they would be able to avoid the unnecessary taxation when the income is not needed. It also would allow them to take larger withdrawals if required as well. This is very helpful if need should arise during an emergency or for larger purchases.
- NO ABILITY FOR ADVANCED FINANCIAL & TAX PLANNING:
This is so often under appreciated when considering to move a pension out or not. By leaving it inside the pension plan, an individual is ensuring that they do not have access to one of the most powerful tax strategies available to Canadians today. A self-managed Registered Retirement Savings Plan (RRSP) or Locked-in Retirement Account (LIRA) is able to be structured so that one may be eligible to move, the otherwise “taxable” assets to the “non-taxable” counterpart known as a Tax Free Savings Account (TFSA).
The strategy is known as the Precedence TFSA Maximizer Strategy and is very likely the most impactful strategy available to Canadians today for reducing their taxable income in requirement. For more information on this strategy visit www.precedencewealth.com/upcomingevents for upcoming workshops.
Every individual situation is different and has its own unique details and considerations. The above should therefore not be thought as an exhausted list. As always you want to ensure that the full details of the options available are clearly reviewed with you and understood when considering transferring pensions to be self-managed.
But more often than not the evidence overwhelmingly supports that a transfer out is most beneficial for Canadians to consider.