When I had a corporate job, my employer had a defined benefit (DB) pension plan. While these golden handcuffs were undoubtedly great, I did wonder what happens to my pension if I quit my job? I knew there would be a few different options. However, I never thought much about it because I assumed I would be with the same employer for my entire working life.
I know, I was so naive. My company had layoffs every few years, so it’s not that I had permanent job security. I knew it was time to fully investigate my pension options when my freelance career started to take off. There was a real possibility that I would quit, so I wanted to have the right information before I made a move. It turns out there were plenty of different things I could do with my pension. More importantly, the transfer process was straightforward.
What happens to my pension if I quit my job?
The first thing to understand is that companies have two different pension plans. Defined benefit pensions give you guaranteed income, and your employer is responsible for all the investing. This is a costly plan to maintain, so many companies now only offer a defined contribution (DC) pension. DC pensions are still good, but it’s up to you to make the investing decisions.
Depending on which pension you had, you’ll be given different options about what you can do with your money. In most cases, you’ll be able to do one (or some) of the following:
- Deferred pension
- Transfer to another Registered Pension Plan (RPP)
- Transfer to a Locked-in RRSP
- Transfer to a Life Income Fund (LIF)
- Transfer to a Restricted Life Income Fund (RLIF)
- Transfer to an insurance company to provide a deferred lifetime annuity
- Transfer excess contribution to an RRSP
- Direct deposit for excess contributions
I realize that people who don’t manage their own finances or are new to personal finance will look at the above list and be very confused. The good thing is, when you do quit your job, the pension administrator will send you detailed paperwork that tells you what your pension is currently worth for each option.
The pension administrator is a financial institution that can answer any questions you may have about your person. Although they handle the pension on behalf of your previous employer, they don’t work for your employer. They’ll be able to look at your individual case and help explain anything you’re not sure about.
Contacting your pension administrator for clarification is handy, but you really should speak to your financial advisor when you’re deciding what to do with your money. When I faced my pension dilemma, my financial advisor confirmed what was the best decision and was able to explain what the various scenarios were. He was also able to help me out with the paperwork, which can be overwhelming at times.
Here’s a quick explanation of your different options, so you’ll have a basic understanding of what’s available before you reach out to someone for additional info.
Defer your pension
Let’s say you had a DB pension at your old job, but now you’ve left. Retirement is still many years away, so the idea of deferring your pension is appealing. With this option, you can’t contribute any more money, but you would have a fixed payout every month when you reach the eligibility date (this could be as early as the age of 55). Since you’re no longer contributing to the pension, how much you’ll get when you do start collecting will obviously be lower than had you stayed in (not that you have a choice). This option is handy since it still gives you guaranteed income. How much you’ll get will be clearly shown in the paperwork.
Purchasing an annuity is similar to deferring your pension. You’re taking the cash out of the pension and then buying the annuity. It does technically give you a bit more freedom, but since you’re buying this product from a commissioned insurance salesperson, you’ll probably end up with less money.
With either one of these options, the amount you get is guaranteed. There’s no thinking or investing required on your side. This is obviously a great choice if you want a hands-off approach. That said, there are some downsides.
If you die, your spouse will usually get paid for 10 years. After that, there’s no more money. Had you taken the lump sum, you could have invested it and potentially have earned more money. Anything that’s leftover can be given to your kids. Of course, this requires you or your financial advisor to actually invest the money. This also assumes you’re able to beat the guaranteed rate of return you get from the deferred option.
Transfer your pension
As you can see from the above list, you have a lot of transfer options. If by chance you’re switching jobs and the new company also has a DB pension, you may be able to transfer things over to the new plan. The value and years given would depend on what your previous pension offered and what’s currently available. It’s not a straight 1:1 exchange as the two pensions may have different values. Not every pension allows a transfer, but this is likely the best choice if given the option.
If you have a DC pension, transferring your pension is likely the easiest thing to do. Transferring your RRSP to another financial institution is quite easy and only takes a few steps. Once your money is in your new account, you just need to choose what you want to invest in. Note that many robo advisors, including Justwealth, Wealthsimple, and Questrade, can help you with this. Since robo advisors have low fees, you’ll be keeping more of your money.
Take the commuted value
The other transfer options are for people who don’t want to defer and can’t transfer to another pension plan. Which one you choose depends on your personal scenario. I decided to transfer to a Locked-in RRSP, more commonly known as a locked-in Retirement Account (LIRA) since I was only 38 when I quit. Older people may prefer to transfer to a Life Income Fund (LIF), which is a type of Registered Retirement Income Fund (RRIF).
Either of these options pays out a lump sum. The pension value calculation is based on legislation set out by the government. Again, this amount will be clearly displayed in your paperwork. There’s also a maximum value that you can transfer to a LIRA or RRIF. If your pension payout exceeds that number, you’ll get that cash deposited into your bank account or RRSP (assuming you have enough contribution room left). Note that this excess money is taxable.
Once your money is in a LIRA or RRIF, you need to invest the money yourself. Since I still had close to 30 years before I retired, I decided to invest in VEQT, which is Vanguard’s all equities ETF. This is considered a riskier choice, but since I knew I couldn’t add to this amount, and I could just adjust my other savings on the fly, I would be okay. As I get closer to my retirement years, I’ll likely switch ETFs to something more conservative.
Can I cash out my pension if I quit my job?
Now that you know the answer to what happens to my pension if I quit my job, you likely still have additional questions. Many people wonder if they can cash out their pension if they quit their job. The answer is not really, but you might be able to get some cash.
As mentioned above, when you take the commuted value, you may exceed what’s allowed under pension rules. Any excess funds will be transferred to your bank account as taxable income. Restricted Life Income Funds will enable you to make a one-time transfer of up to 50% of your pension into a regular RRSP. You could technically withdraw money from your RRSP, but you’d be taxed heavily, and you’d permanently lose that contribution room.
If you’re looking to get the entire sum of your pension transferred to your bank account, it’s not happening. There are rules in place that prevent this from happening.
Can you lose your pension?
Technically speaking, DB pensions are meant to be guaranteed. However, there are times where things could go south. Some major companies in the past, such as Nortel, have gone bankrupt, making it impossible for them to continue paying out employees who have retired. Even Canada Post right now is struggling to fund its pension plan.
Some DB pension plans have no chance of ever going bust. Think government pensions, teachers, and nurses. Those plans are so big and are invested in so many things around the world that it’s nearly impossible for them to fail.
If you have a DC pension, you can’t lose your pension. Still, you could technically make terrible investing decisions that could lower the value of your pension. Having a pension of any kind is great, but you need to do some basic research to understand what you’re investing in.
Is it worth leaving a job with a pension?
Let’s get real for a second. A DB pension is insanely good. If you have one, you’re guaranteed income when you retire. If you’re going to leave your job, you need to be doing it for a good reason. A higher title and increase in pay may be worth it alone, but it’s not always about the money. I left my old job and my DB pension because I wanted to spend more time with my family. Admittedly, it was hard to do, but that pension money would never buy me time.
Now, if you have a DC pension, leaving is a little easier since your employer was just giving you a small match. Again, hopefully whatever job you’re taking next will pay you more to make up for the loss or offer similar benefits that are worth your while.
There’s no reason to rush your pension decision. You’ll usually have about 2-3 months to decide what to do with your money. This will give you more than enough time to speak to a financial advisor and get your accounts set up. With this info, there’s more need to wonder what happens to my pension if I quit my job in Canada.