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In this article, we’re going to talk about pension transfer, how it works in Canada, and what your options are.
Within 30 days after you resign from a job or your employment termination, your pension plan provider or administrator should provide you with a written statement of benefits. This statement outlines your rights and options in regard to your accumulated pension with your previous company.
When you resign from a job and you have a workplace pension plan, you have a couple of options depending on the type of group pension plan your previous employer has in place.
Group pension plans are an important part of the retirement planning process when you’re moving from one job to the next, keeping track of your previous group pensions, and updating the pension administrators can be challenging, that’s why it’s important to consolidate group pensions from previous employers where applicable.
Nowadays, the average number of years people stay at the same employer is 4.1 years, if you’ve started your career at 20-years old, you would have between 9 to 10 jobs before the age of 65.
If you change jobs every 4 years or so, it may be important to consolidate the group pensions from your previous jobs into a single locked-in registered account. This not only gives you more control over the investment of your money but also makes managing your retirement funds simpler.
Important Things to Know About Pension Transfers:
- You have to decide what to do with your money within a certain amount of time.
- You can choose to move your money into an individual retirement account (IRA), into another group plan (your new employer), leave it with your company’s group pension carrier, or buy an annuity.
- Make it a point to open the mail that you receive from your pension administrator, most people fail to initiate their pension transfer because they fail to open their statement of benefits, in most cases the pension transfer deadline is only 90 days.
- You have to pay taxes on the unlocked portion of the pension transfer, which is released to you since group pension plans are tax-deferred as an RRSP.
What is a pension transfer?
Basically, pension transfer is simply the process of transferring a group pension plan into an individual, a group pension plan, or an annuity. A pension transfer usually happens when you resign or leave your job, provided that you’ve worked with the company for a number of years, you would usually have accumulated a certain amount of money in that company’s group pension plan, which you can transfer or leave with your previous employer’s pension administrator.
Since you’re no longer part of the group, your pension plan needs to be moved out of your previous employer’s group pension. If you fail to move it, it remains with your employer’s pension administrator but it may no longer be part of the group plan or you may have to pay fees based on the group rate.
How do you initiate a pension transfer?
If you’re unsure about how to go about the process of a pension transfer, it is important to seek professional guidance.
The pension transfer letter (statement of benefits) that you will receive after you leave your previous job will usually indicate the type of group savings plan that you have with your previous company, and what your transfer options are.
Consolidating your group savings into one individual locked-in plan simplifies the management of your previous group accounts and gives you more control over the investment of your money.
If you’re transferring your old group pension plan into your new employer’s pension plan, you will need to work with your new company’s pension administrator.
Whether you’re transferring into an individual retirement account such as LIRA or an RRSP or to another group pension plan, the first step is to submit the statement of benefits that you received to the financial professional that you’re working with.
There are different types of registered group savings plans, the most common are the following:
Some employers don’t have pension plans per se but offer their employees a group RRSP instead.
Defined Benefits Pension Transfer Options
- Transfer your pension to your new employer’s pension plan: If you decide to transfer your pension to your new employer’s group pension, be sure your new job offers a workplace pension plan and that you can transfer your existing one.
- Leave your pension in your current employer’s pension plan: if you leave your pension with your current employer’s plan, your funds remain locked in. In most cases, the pension amount that you will receive at retirement is already calculated and stated in the pension statement, while some will allow your funds to remain invested and continue to accumulate. Note that you will have to keep the pension administrators up to date with any life events or changes such as getting married, divorced, or moving to a different address over time until you retire so you don’t miss out on your pension benefits.
- Transfer your Pension into an Individual Account: You could transfer your pension to a Locked-In Retirement Account (LIRA) offered by a financial institution through advisors like us, or with a bank. This would allow you to keep the money invested and continue to grow it, rather than having it paid out as a monthly pension cheque. A LIRA is similar to a registered retirement savings plan, but it’s locked-in, meaning you can’t access the money until you retire. If you do this, be sure to speak with a financial planner or carefully research your investment options. If you invest poorly you may lose your retirement funds.
Defined Contribution Pension Transfer Options
1. Transfer your Pension into an Individual Account You can do this in two ways:
Transfer to LIRA:
A LIRA (Locked-in Retirement Account) is similar to a registered retirement savings plan, but it’s locked-in, meaning you can’t access the money until you retire. If you do this, be sure to speak with a financial planner or carefully research your investment options. If you invest poorly you may lose your retirement funds.
Buy An Annuity:
An annuity is an agreement with an insurance company where you will receive a guaranteed income during retirement. You can usually purchase this type of annuity from a life insurance company. An annuity is an agreement with an insurance company where you pay a lump sum, and in return, you will receive a guaranteed income for a period of time during your retirement. This income can continue beyond the original term of the contract if the annuity provides survivor benefits or a guaranteed minimum payout.
2. You can transfer your pension to your new company if it provides a pension plan. This will turn your money into a retirement account that is locked in until you retire (LIRA).
3. Leave your pension where it is: If you are allowed, leave your pension in your current employer’s pension plan. If you leave your money in your retirement account, it will stay there and continue to grow. This is because the money will be invested in different ways, depending on what you choose, and the markets can go up or down. If you do this, you may continue to be charged fees at the group rate, even if you leave the company. However, this is not always the case. You could be charged a higher administration fee, so it is important to ask what this fee is before making a decision.
Make sure you keep your service provider up to date with any life events, like getting married or having a baby. This is especially important if you move, so they can keep track of your new address. If they can’t find you when it’s time to give you your pension benefit, you’ll miss out!
Transferring a group RRSP into an individual RRSP is a pretty straightforward process. First, you’ll need to open an RRSP account, then submit a direct transfer form (T2033 Direct Transfer Under Subsection 146.3(14.1), 147.5(21) or 146(21), or Paragraph 146(16)(a) or 146.3(2)(e)). This can be done simultaneously at the time of the RRSP application.
When should you start the process of initiating your pension transfer
You should receive your pension plan’s statement of benefits in the mail within 30-days, if you didn’t receive it, contact your previous company’s HR or the group plan’s administrator.
In most cases, you only have 90 days to transfer your pension. You should start initiating your pension transfer as soon as you receive the pension plan’s statement of benefits. If you’re not sure on how to proceed or you’re confused about the instructions on the statement of benefits, book an appointment with us here, and send a copy of your statement of benefits to admin[at]smartwealthfinancial.ca.
After you’ve submitted all the required pension transfer documents, your previous employer’s plan administrator has to transfer your pension funds within 90-days.
What are the tax implications of a pension transfer?
In most cases, transferring your pension will result in a one-time increase in your taxable income for the year.
Both defined benefit and defined contribution plans allow you to withdraw funds from your group pension that are not locked in during a pension transfer. The amounts that you withdraw get added to your taxable income for the year.
How to Avoid the Tax Implication(s) of A Pension Transfer
You have to make sure that you’re transferring your registered group savings account into another registered plan by using the proper CRA transfer forms. Otherwise, it may be deemed as a normal withdrawal, which could result in a huge tax bill.
If you’re transferring a group RRSP, you will need to fill out a form T2033 Direct Transfer Under Subsection 146.3(14.1), 147.5(21) or 146(21), or Paragraph 146(16)(a) or 146.3(2)(e).
RPP pension transfers on the other hand would require form T2151 Direct Transfer of a Single Amount Under Subsection 147(19) or Section 147.3
The financial institution you’re transferring your account to should have a supply of these forms, if you would like to work with us, we can help you go through the process of the transfer.
One thing to watch out for when transferring an RPP is a portion of your pension funds may be unlocked at the time of transfer, and while most Canadians are excited to receive the portion of the funds that get released to them, you have to keep in mind that this amount will be added to your taxable income at the year of withdrawal since these amounts are pre-taxed dollars.
While such amounts can be used to fund so many things, like paying off debts or financing moving expenses, it’s best to deposit these into an individual RRSP account in order to avoid a huge tax bill, especially if you’re already in a high-income bracket category.
Say, you’ve earned $50,000.00 for the year and you received the non-locked-in portion of your pension plan of maybe around $10,000.00. That amount gets added to your taxable income, hence your tax bracket is going to be based on $60,000.00 of earned, taxable income.
Benefits of transferring my pension plan into an individual plan
There are a few benefits to transferring your pension plan into an individual plan. One is that you will have more control over how your money is invested. With a pension plan, your employer usually has control over how the money in the plan is invested, with some allowing you to choose your own portfolio. With an individual plan, you can choose how to invest your money and can change your investment choices.
In today’s gig economy, Canadians move from one job to the next. If you’ve worked 20 different jobs before you retire, it can be tough to track all your pension benefits from your previous employers. So, if you find yourself moving from company to company, you may well move your group pensions into an individual registered retirement plan so you don’t miss out on benefiting from your accumulated pension funds at retirement time.
Moving your pension will also give you more control over the investment of your pension funds.
Consolidating your various group retirement savings into one or two registered accounts is more convenient and easier to track. If you’ve worked multiple jobs before retirement, you have to update all pension plan administrators of your address, otherwise, you will not receive your pension benefits at retirement. Transferring your funds into individual LIRA accounts each time you move jobs makes it a point that you don’t miss out on any of your funds come retirement time.
Benefits of transferring my pension plan into a group plan
One of the main benefits of transferring your pension plan into your new employer’s group plan (if permitted) is consolidation because you’re merging your previous pension plan into your new group plan, which means you’re technically bringing along your old group pension into your new group pension plan.
This makes sense if you see yourself staying with your new employer for a long time or you plan to retire with your new employer.
The tricky part with transferring your pension to your new employer is the fact that you may not be entitled to any group benefits until after 90-days of employment as most employers don’t offer group benefits when you’re on probationary employment. This means that your transfer deadline may have already expired before you’re entitled to your new employer’s group pension plan.
Types of Group Retirement Savings Account
Group RRSP (Registered Retirement Savings Plan)
A group RRSP is a retirement savings plan that is sponsored by an employer and open to all employees of the company. Contributions are made through payroll deductions, and the money is invested in a variety of different assets, such as stocks, bonds, and mutual funds.
The major advantage of a group RRSP is that it allows employees to save for retirement without having to set up their own individual plans. In addition, many employers offer matching contributions, which can help employees to boost their savings.
Another advantage of a group RRSP is that it offers flexibility in terms of investment options. For example, some plans allow employees to choose how their money is invested, while others offer pre-determined investment portfolios.
Ultimately, a group RRSP can be a great way for employees to save for retirement, especially if their employer offers matching contributions.
Registered Pension Plans (RPP)
A registered pension plan (RPP) is a group retirement savings plan that is registered with the government. RPPs are sponsored by employers and employees make contributions to them during their working years. The money in the plan is then used to provide income for the employee during retirement.
Two main types of RPPs:
Defined Benefit Plans (DBP)
A defined benefit pension plan is a retirement plan in which an employer agrees to pay a certain level of benefits to employees upon their retirement. The key feature of a DBP is that the benefit payments are not linked to the investment performance of the plan, as they are in defined contribution plans. Instead, the benefits are determined based on a formula that takes into account factors such as years of service and salary history. DBPs are also often known as “traditional” pension plans. In Canada, DBPs are regulated by both federal and provincial legislation.
Under a DBP, the employer is responsible for ensuring that enough money is set aside to cover the future benefits that have been promised to employees. This funding responsibility – along with the fact that DBPs are typically offered by larger employers – means that DBPs are often seen as a more secure form of retirement savings than defined contribution plans.
Employees who participate in a DBP must make sure they do not retire before they reach a certain age (the “normal retirement age”). If they do, they may receive reduced benefits or no benefits at all.
DBPs are being phased out in favor of defined contribution plans, as they are seen as being less costly and more portable for employers. However, many Canadians still have DBPs as their primary retirement savings vehicle.
Defined Contribution Plans (DCP)
A defined contribution plan (DCP) is a type of pension plan in which the employer and/or employee contribute a fixed amount of money to the plan on a regular basis. The money in the plan is then invested, and the final benefit payable to the retiree is based on the investment performance of the fund. In Canada, there are two main types of DCPs: registered retirement savings plans (RRSPs) and registered pension plans (RPPs). Both types of plans offer tax advantages, but RRSPs are more flexible in terms of how and when you can make contributions. RPPs are typically more stable, but they may have less flexibility when it comes to withdrawals. Whether you choose an RRSP or an RPP depends on a number of factors, including your age and income.
Employees who participate in a DCP have the ability to choose their own investment options, within certain limits set by the plan administrator. This gives employees more control over their retirement savings and allows them to take advantage of changes in the market. However, it also means that there is some risk associated with DCPs – the value of your savings can go up or down, depending on how the investments perform.
DCPs are becoming increasingly popular in Canada, as more and more people are recognizing the importance of saving for retirement. They offer a number of benefits over other types of retirement savings plans, such as flexibility and control. However, it is important to remember that there is some risk associated with them, and you may not get the same level of benefits as you would under a DBP.
When you leave your job or you received an offer from another company, you may have accumulated a material amount of money with your existing employer’s group pension plan.
You will usually receive a letter from your group pension’s administrator, this letter is your pension’s statement of benefits. It details the type of pension that you have with your current employer, your pension transfer options, the deadline for submitting your decision, and the corresponding requirements in making the requested change.
There are basically three options when you’re changing employers. Either you move your money into an individual RRSP from a group RRSP or LIRA for defined pensions, move it to your new employer’s group plan if allowed, or leave it with your previous company’s pension administrator.
If you don’t see yourself working on your next job for a long time or until retirement, it may be a good idea to consolidate your group pensions into an individual LIRA account. This gives you more control over the investment of your money and it makes it easier to track your funds from previous employers over the years at retirement time.
Gone are the days when people only worked one or two jobs until they retire. In today’s gig economy, you may end up working 20 jobs before you retire, if half of these companies have group pensions, it may be difficult to track your pensions and keep all of their pension administrators up to date with all life events, which risks missing out on some of the pensions at retirement.
If you recently resigned from a job and are looking to transfer your pension into an individual plan, we can help. Simply book a consultation at your convenience, and send a copy of your statement of benefit to admin[at]smartwealthfinancial.ca.
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