Show Me the Money! (Part 2)
Posted by Gail | Filed under Retirement Planning
If you have a pension plan at work, you’re in luck! It’s time to find out more about your plan (if you’re in the dark), and how much you’ll likely receive.
Corporate pension plans fall into one of two basic categories:
- Defined benefit plans, and
- Defined contribution plans.
Defined benefit plans (DBPs) incorporate a promise to pay out a regular income calculated according to a predetermined formula. With this type of plan, you’ll know exactly how much you’ll receive at retirement.
Defined contribution plans (DCPs), also referred to as money purchase plans, define the annual contributions required by the employer (and in many cases by the employee). The size of the pension depends on the amount of money accumulated through contributions and earnings in the plan.
Make sure that both you and your spouse have a good understanding of your pension benefits. It’ll be important to know if your plan will continue to pay your spouse an income after you die. Some company pensions end with the death of the pensioner. Others pay a reduced percentage to the surviving spouse. If there is no continuation of income, or if that income will be reduced significantly, both of you will have to make some decisions about how you structure your other sources of retirement income.
Find out if your pension is indexed since inflation can eat away at your pension benefits. Check to see if your pension provides for full or partial indexing, and find out when that indexing kicks in. Also check to see if your company plan is integrated. In other words, will your company benefits be blended with CPP to provide your income? If your company pension plan is integrated, whenever you get pension income estimates from your employer don’t double-count your CPP benefits.
Here’s a list of questions you can use to help identify the important features of your company pension plan.
- What types of plans does your company offer? Do you have a choice? Will that choice make a difference in the amount of retirement income you could collect?
- Is there an eligibility period to belong to your pension plan? Do you have to participate? Do you have to make contributions? If so, how much? When does the plan vest so that you will be entitled to all your employer’s contributions? Can you make contributions above those required? Can you buy more pension credits to increase your income during retirement?
- What happens if you leave the company? Can the pension remain intact? Can you take it with you? Can it be transferred to a locked-in RRSP? What happens to the employer’s contributions? To your contributions?
- How much income will you receive if you stay with the plan until retirement? Will your entitlement be affected by government pensions? What happens if you retire early? Retire later? What’s the earliest date you could retire with full benefits?
- Is your pension indexed to provide protection against inflation? When does indexing begin?
- What happens if you die before you retire? After you retire? Does your spouse receive benefits? Are those benefits reduced in any way? Does your plan offer any income flexibility?
- What happens if your marital status changes? Will your pension credits be split automatically? Will a new spouse be eligible for your pension?
- If early retirement is encouraged or available, how will it affect your short-term (up to age 65) and long-term (after age 65) income? If your plan is integrated, will the company pay the CPP portion until you apply for benefits? Will your company increase your pension benefits to cover the amount you would have received if you had waited until 65 to claim your CPP benefits?
Next Week: Estimating Your Expenses
May 6, 2009 at 8:47 am
Question for you Gail.
You noted finding out whether you can leave the pension intact, roll over into Locked in RRSP, etc. Is there a rule of thumb for determining which would be better: leaving it intact when you leave or rolling over to RRSP? The reason I ask is that twice I have left companies where I had a pension plan. For one for 5 years I left it there before finally rolling it over and with the other one as soon as I left, I rolled it over. With the 2nd one it made sense since I was there for less than a year but the other one was a few years worth (Ontario Teachers Pension) and I have wondered if I made the best decision – I just thought I would have better control. I am wondering too so that if this happens again I will be better prepared.
May 6, 2009 at 8:50 am
for some reason pensions have always scared me and my eyes glaze over and i used to get ticked when i would see the deductions for my pension plan on my pay stub. i was indignant, “that was $65 i didn’t have to spend on stuff!”
nowadays, pensions still scare me and my eyes still glaze over, but now i love seeing the amount taken off on my pay stub.
i do need to learn more about my pension plan though.
i’ve always wondered about this though: i worked part time a few years ago and the company had a pension plan. my contributions were quite minimal…but what happened (s) to that money now that i don’t work there? does it just sit there and wait for me to retire? how will it know i’m retiring? i guess i should really phone them too…
May 6, 2009 at 9:17 am
FG: Keeping the pension in place means you’ll be guaranteed an income and need not worry about the management of the funds. However, if you haven’t been with the company for a long time, that income may be very small, which is why some people chose the rollover. Long-lived employees in the right plan may also be able to arrange a lifetime survivor benefit for a spouse, and get inflation protection if their plan is indexed. And by opting out of the pension plan, you may forfeit other benefits such as dental, health and life insurance coverage.
Some people choose to rollover because you can delay when the funds are paid since you don’t have to mature the RRSP at 65. You’ll be able to control the management of the funds and select investments that best reflect your needs, which can be a pro or con depending on whether you want this job or not. And, upon your death, your spouse can roll the entire remaining value of the locked-in plan to his/her own RRSP or locked-in plan depending on pension legislation. A locked-in plan also provides greater flexibility for tax and estate-planning purposes.
Dinah, I think most people feel as you do, which is why we’re so willing to ignore this very significant part of our financial lives. It may also be why so few people choose to use an RRSP: we just don’t want to think about it.
May 6, 2009 at 9:20 am
Thank you so much for this post, Gail.
I have a defined benefit plan, but only just recently learned what that actually meant. Pensions haven’t been something I’ve paid much attention to until now, so the learning curve is steep.
We’re facing a situation where I will have a defined benefit plan, and hubby MIGHT, but his will likely only be calculated at half (he will likely be working 3-4 years, off for 3-4 years, working 3-4 years, etc.) He’s also 10 years older, and thus has less time within which to maneuver. If anyone has any suggestions for how to structure our retirement savings so that he’s taken care of, I’d love to hear them.
May 6, 2009 at 9:24 am
Bird in the hand?
My pension situation is under discussion at my work right now. I am 50. I collect a small defined benefit pension of $500/month from my former employer (I became ill and while ill was terminated). This pension will never go down but will increase when the 5 year performance of the plan exceeds 6%. $2000 of this payment is tax free under current tax laws.
Here’s the problem that I’d love readers of this blog to comment on…I am now well enough to work full time. My new employer is affiliated with old employer and the pension is the same one. I have been given three choices: stop recieving the $500/month in order to rejoin plan and receive employer contribution of $250/month in addition to my own; keep receiving $500/month and stay out of pension plan, losing the $250 employer benefit or (and this is the scary one) move to a different payroll scheme in which I could keep the $500/month received pension, contribute to a different pension fund and receive employer contributions BUT lose life insurance and LTD coverage.
I am leaning towards option 2 (losing employer contribution but keeping $500 payment, life insurance and LTD) and just putting my share in an RRSP. I am terrified of losing LTD coverage.
My husband has a good defined benefit plan (with spousal continuation option) and we will be mortgage free at retirement. My little pension will continue and maybe get a bit bigger.
I’d really appreciate hearing some other perspectives on this situation. what would YOU do?
Thanks everyone!
May 6, 2009 at 9:30 am
This is for Kate:
When you take out your pension, you have to specify the type of payment you want. If you are married, the lawa requires that at least some of your pension be payable to your spouse if you should predecease him. However, there is a range of amounts that you can specify from 50% to 100% continuance. The amount you choose for your husband will affect the payments made to you, but in my opinion, the price is neglibible. So if you choose 75% of your pension to continue for your husband, the initial payments may be $25/month lower…but this seems to me a small price for knowing that your husband will have a pension. The percentage you select will depend on his resources at the time of your retirement.
hope this helps.
May 6, 2009 at 10:31 am
My Pension is a good one (I think).
You are eligable to enrol in the Pension two years after your hire date (which is 17 months for me and counting). There is a manditory employee contriubtion of 5% which is matched by the employer. Two years after the commencementof the Pension, it becomes vested (yahoo!).
So.. I wait. This October I will have the opportunity to discuss a raise in salary. I am guessing that it won’t be significant due to the economy, so my stratagy will be to ask to join the pension early.
May 6, 2009 at 12:15 pm
I wish there was a pension plan at my work available.. stupid thing is I work for a YIG which is a branch of Loblaws.. YIG’s are franchise stores.. we do not have pension plans.. BUT employees at the corporate stores get the option. and the 10% employee discount! just a bit of a rant lol
Guess I will have to stick to regularly funding my RSPs…
May 6, 2009 at 2:38 pm
neither me, nor my spouse have pensions through work, not many people I know do! But, we are contributing to RRSPs and hoping!
May 6, 2009 at 6:23 pm
Most employers that offer pension plans offer free seminars to explain them once a year or more. Go – you’ll be surprised at how much you can learn. The presenters are generally happy to answer questions, and usually know a lot about the various options and details. If your employer does not offer this, get together with collegues and ask for it!
May 6, 2009 at 6:52 pm
Wahoo, no comment about today’s blog, but Gail is coming to my CITY. WAHOO! Excited. Should buy my ticket before the word gets out. Not telling you where I live.
May 6, 2009 at 9:12 pm
What if you don’t have a pension plan at work (ie. you work freelance or on contract)?
May 7, 2009 at 1:38 pm
I have an employer matched plan at work, and am thrilled to watch the YTD balance rise. I contribute 5.5% of basic gross income (less tips/overtime, etc), which they match, totalling 11%. I can increase my portion another 7%, (which they don’t match) to a maximum of 18%. I contemplated doing this, but decided that I would work on my emergency fund and debt repayment first, since I am already saving more than the suggested 10% for LT savings. I have asked questions, but now have more specific questions to ask my Comp and Benefits rep. Years ago, I tutored briefly at my Post secondary institution, earning a very small matched pension contribution. Over the past five years, this small amount has increased substantially. When I inquired about rolling this into my current plan, I was told that the new plan had to be an exact ‘match’ in type of pension. Since I didn’t have a clue what any of that jargon meant, I just left it. I guess I should look into the matter again, now that I know a bit more. I just wish I had a longer working life to accumulate a pension (in my early 50’s, long time stay at home mom). Does anyone know if I can get half my former husband’s pension contributions accumulated during our marriage? We have been divorced 9 years, and I heard somewhere that could be an option open to me.