A new job can bring a higher salary, better benefits, or a welcome change of pace. If you have a defined benefit pension with your current employer, it can also bring a financial decision that affects your retirement for decades.

Before accepting an offer, it is worth understanding what happens to the pension you have already earned. You may be able to leave it in the existing plan, transfer it to a new employer’s pension plan, or take its commuted value. Each path comes with different benefits and responsibilities.

What are your options when you leave?

Your choices depend on your age, the terms of both pension plans, and the applicable pension legislation. Ask your plan administrator to confirm your options and deadlines in writing. [1, 2]

1. Keep your defined benefit pension

Leaving your employer does not necessarily mean leaving its pension plan. You may be able to retain the pension you have earned and begin receiving monthly payments when you reach an eligible retirement age. This is often called a deferred pension.

You generally stop earning additional service in the old plan, but retain a future income entitlement under its terms. Compare the pension available after leaving with your intended retirement date; a projection that assumes you keep working there can overstate what you will receive. [2]

2. Transfer to your new employer’s defined benefit plan

If your new employer offers a defined benefit pension, a transfer may be possible where the plans and applicable rules permit it. Confirm what the transfer would purchase: the same number of years in your old plan may not translate into the same service credit in the new one.

Request a written comparison of credited service, retirement eligibility, inflation protection, and survivor benefits. Ask whether a shortfall would require an additional payment. Moving into another pension plan deserves its own analysis. [1, 3]

3. Take the commuted value

The commuted value is the calculated present value of the future pension benefits you have earned. Where eligible, you may transfer it to a locked-in retirement account and invest it rather than receive a pension from the old plan.

This gives you more control over investments, while shifting responsibility for funding retirement to you. Locked-in funds have withdrawal restrictions. Once the transfer is completed, the decision is irreversible. [1, 4]

What should guide the decision?

Your risk tolerance and ability to absorb losses

How would you feel if the investments supporting your retirement fell significantly? More importantly, could your financial plan withstand that decline?

Comfort with investing and the ability to absorb losses are different things. Someone relying on this pension for essential expenses may have less room for disappointing returns than someone with substantial other income. A comparison should account for investment fees and test weaker returns, including losses early in retirement while withdrawals are being made. [2, 3]

Longevity risk

Longevity risk is the possibility of outliving your savings. A defined benefit pension provides income for life under the plan’s terms. If you commute and invest the pension, your money must support an uncertain number of retirement years.

Good health and a family history of longevity can make lifetime income particularly valuable. Health concerns may change the discussion, but the analysis should still consider how long a surviving spouse could need financial support. [3]

Estate considerations

A transferred account may leave remaining funds for loved ones, subject to spousal rights, beneficiary rules, and taxes. The amount available will depend on investment results and how much you withdraw.

Keeping a pension can also provide valuable survivor benefits. Compare what your spouse or other beneficiaries would actually receive under each option, both before and after retirement. Neither option automatically produces a better inheritance. [1]

Your spouse’s pension as an income foundation

This is a household decision. If your spouse has a substantial defined benefit pension, that income may help cover essential expenses and reduce the household’s reliance on investment withdrawals. In that sense, it can act as a hedge against some of the uncertainty involved in commuting your own pension.

That does not automatically make commuting the right choice. A household analysis should test whether the remaining pension income covers your needs, how it keeps pace with inflation, and what happens when either spouse dies. The balance between dependable income and invested assets should reflect your shared retirement goals.

The benefits and taxes behind the headline number

Review early retirement reductions, bridge benefits, inflation protection, and any retiree health coverage affected by leaving. These features can materially change the comparison. [1]

The quoted commuted value may also exceed the amount you can transfer to a locked-in account on a tax-deferred basis. An excess amount can be taxable, although available RRSP room may allow an offsetting deduction through an eligible contribution. Compare the amount available after taxes, rather than assuming the full quote can be invested. [5]

Speak to a professional before you decide

If you are thinking about changing jobs and have the option to commute your pension, speak with a qualified financial planning professional before making your election. Ideally, begin the discussion while evaluating the job offer, so the pension implications form part of your decision.

A useful analysis should deliver a clear comparison of your available options, projected retirement income after taxes, the investment return required after fees, and the impact of weaker markets or a longer retirement. It should also show how each choice affects your spouse and estate.

At Innova, we can help you assess these choices within your broader financial plan. Bring your pension statement, any election package, and details of your new employer’s pension and benefits. Confirm deadlines with the administrator so there is time to review the options.

A career move should support both the life you want today and the retirement you are working toward. Understanding your pension is an important part of getting that decision right.

Sources

[1] FSRA — Member Guide on Commuted Values
https://www.fsrao.ca/consumers/pensions/member-guide-you-terminated-employment-what-commuted-value

[2] OMERS — Leaving your employer
https://members.omers.com/leaving-your-employer

[3] HOOPP — Leaving your HOOPP employer
https://hoopp.com/members/employment-change-and-list-of-hoopp-employers/how-to-transfer-your-pension

[4] FSRA — Locked-in Accounts
https://www.fsrao.ca/consumers/pensions/events-may-affect-your-pension/locked-accounts

[5] CRA — Registered pension plan lump-sum payments
https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/rrsps-related-plans/transferring/registered-pension-plan-rpp-lump-payments.html

This publication is for informational purposes only and shall not be construed to constitute any form of advice. The views expressed are those of the author alone. Opinions expressed are as of the date of this publication and are subject to change without notice and information has been compiled from sources believed to be reliable. This publication has been prepared for general circulation and without regard to the individual financial circumstances and objectives of persons who receive it. You should not act or rely on the information without seeking the advice of the appropriate professional.

Aligned Capital Partners Inc. (“ACPI”) is a full-service investment dealer and a member of the Canadian Investor Protection Fund (“CIPF”) and Canadian Investment Regulatory Organization (“CIRO”). Investment services are provided through ACPI (or) Innova Wealth Management, (if applicable) an approved trade name of ACPI. Only investment-related products and services are offered through ACPI/Innova Wealth Management and covered by the CIPF. Financial planning and insurance services are provided through Innova Wealth Partners. Innova Wealth Partners is an independent company separate and distinct from ACPI/Innova Wealth Management.