Employment Status Change - What Happens to Your Pension Plan?

Employment Status Change - What Happens to Your Pension Plan?

A change in employment status can be triggered by several circumstances, the most probable being either a job loss or a change in employer. Many people never give much thought to what happens to their pension plan in such circumstances until this becomes their reality. Depending on if your employer provides a pension plan and how long you have worked with them, you may have a significant amount of money in your current pension plan.

There are various options on how to treat your pension contributions when you leave an employer. These options may vary based on the type of pension plan provided by your employer. The two common types of employer pension plans are the defined benefit plan and the defined contribution plan.

What is the Defined Benefit Pension Plan?

The defined benefit pension plan provides a defined benefit that the employee would be entitled to upon retirement. This defined benefit is derived from calculations based on your years of service, earnings and retirement age, amongst other variables. In this type of plan, your employer is responsible for paying your pension benefit based on the contributions they have made into a pension fund. Depending on your employer, you may also contribute to this pension plan.

What is the Defined Contribution Pension Plan?

In a defined contribution pension plan, your retirement income depends on a defined amount that you and your employer contribute into your plan. Companies are required to make contributions on your behalf; however, you can also make employee contributions as well. Generally, you would have access to your pension plan investment options and be able to select the investment assets in the plan based on your risk appetite and investment strategy. Your retirement income would be determined by the contributions and the performance of the investment assets in your plan.

Pension Options After an Employment Status Change

So, what happens to your pension plan when you leave your current employer before you retire?

Governed by the pension legislation in most Canadian jurisdictions, pension plans allow you to vest (own) your pension when you leave an employer. The specific requirements may vary based on the employer, how much they have contributed to the plan and the number of your years in service.

Typically, the payroll and benefits team from your current employer would provide you with details on how to contact the pension service provider that manages the company pension plan.  In most cases, the pension service provider would contact you to discuss your options and if you haven't selected your preferred treatment for your pension plan before the specified deadline (usually 30 days after leaving your current employer), a default option may be selected on your behalf.

Here are the options for your pension plan upon leaving your current employer.

1. Transfer your pension to a new employer

If you got a new job and are changing your employer, you may be able to transfer your pension plan to your new employer’s pension plan provided this is allowable by your previous and new employers as well as the pension plan service provider.

2. Leave your pension in your current plan

Depending on the type of pension plan that you currently have with your employer, you may be able to maintain your current pension plan. Usually, you would not be able to access the money contributed into your plan until retirement. If you have a defined contribution plan, your retirement benefit would depend on the performance of assets your plan invests in and also any fees paid to the fund managers in charge of your plan. If it is a defined benefit plan, your calculated benefit would be determined based on the amount already contributed, your salary and years worked as at when leaving.

3. Transfer your pension into a locked In Retirement Account

A Locked-In Retirement Account, commonly referred to as LIRA, is similar to a registered retirement savings plan (an RRSP). When you transfer the contributed funds in your current pension plan to a LIRA, it becomes locked, and you cannot withdraw your contributions until retirement. You can decide to transfer your pension plan to a LIRA managed by your current pension plan service provider or use a different financial institution.

4. Purchase an annuity

You may be able to purchase an annuity with the money in your current pension plan from a life insurance company or any financial institution that is allowed to provide this service. This annuity provides you a guaranteed retirement income based on the plan you purchase.

5. Withdraw your contributions

Some pension plans do not allow you to make cash withdrawals until you reach the eligible retirement age. However, if you are able to take your money from your pension plan, you can put this into a personal RRSP (locked or unlocked) or even a tax-free savings account (TFSA).

Factors to consider

There are a number of factors to consider when deciding how to treat your pension plan in the event of a change in employment status.

• Tax Implications: If you are able to withdraw cash out of your pension plan, these would generally be subject to tax as the initial contributions to your plan were tax-deductible.
• Plan provider: Financial institutions charge fees to manage pension funds, this can affect your decision to keep your pension plan with your current employer and plan provider especially if they offer lower management fees.
• Employer: Your options may vary across employers. Although some plans may be insured, you would want to consider the financial health of an employer before you leave your pension plan with them. In the event of a bankruptcy, your pension benefits may be affected if not fully insured.

If you are employed by the federal public service, you can find more information on options for your public service pension plan when terminating your employment here.

Conclusion

Whichever pension plan route you opt for should align with your long-term retirement and investment goals. Ensure that you understand the financial implications of the pension plan options before you make a decision as this is usually irreversible. Also, it is recommended to update your contact information as well as beneficiary details regularly to ensure that your family is able to access your hard-earned money in the event that you are medically unable to do so or in death. Finally, make sure to consult the services of financial advisors and tax experts as this may help you make the best decision for your pension plan.