The world of pensions tends to cleave into defined benefit plans in which an employer holds money and takes the risk that returns may or may not be enough to meet obligations and defined contribution plans in which the employee invests money at his or her own risk. Taking the money out of a company pension plan as cash, often possible if one terminates employment before scheduled retirement, or transferring it to a deferred income plan such as a locked-in retirement plan can make sense.
1. If you have other pensions such as CPP, OAS and former or even current company pensions and they are adequate for retirement income, taking cash from a DB plan to diversify investments can add to potential growth. The existing pensions in the plans create a floor for future income, so the risk of investing can add to future assets and income, says Adrian Mastracci, a financial planner and portfolio manager who heads KCM Wealth Management Inc. in Vancouver.
2. You can take cash to invest in your own choice of stocks, bonds or funds. With fund investments, you can add managers or assets of your own choice. If you are an experienced investor or you know a sector well, perhaps because you have worked in it, self-investing can have a good result, notes Dan Stronach, a financial planner who heads the Stronach Financial Group in Toronto.
3. You want to quit. If the early retirement penalties are high and you quit, you may be able to get an advantage by taking out a measure of the commuted value — what the pension is worth — and roll the money into a deferred pension plan like a LIRA with no tax on the transfer. This works if you plan to extend your working life, effectively delaying the pension payout and perhaps lowering tax until full retirement, Mr. Stronach says.
4. The company is in trouble and you are not confident of the adequacy of funding of the pension plan. Sometimes it is better to take the money, put it into a tax-deferred plan or even to take the cash and pay tax. If a pension plan is seriously underfunded, the company, if wound up, would owe the plan money. If the company cannot pay, those employees still dependent on the pension plan could suffer. It happens, but rarely, says Gordon Meger, a tax partner at BDO in Winnipeg.
5. If you are planning to leave Canada for a lower tax jurisdiction, you can arrange to take the money, pay tax as charged and have lower future tax rates in the future on the income the money generates. It is essential, however, to check Canada’s tax treaties with your next country of residence.