Should your pension move with you?
Defined benefit pension plans: Leave it or commute the value?
Career mobility is a fact of life these days and workers are switching jobs more frequently than in the past. For those who are changing jobs and are members of a defined benefit (DB) pension plan, among your first decisions should be what to do with the plan from your former employer. It's a decision to be weighed carefully, and involves various financial and non-financial considerations.
If you have paid into a DB plan with your former employer, you will have to choose whether to leave your pension entitlements within the pension plan, or to transfer what's called the "commuted value" to an individual locked-in registered plan. Commuted value is the lump sum present value of the pension benefits to which you are entitled under the pension plan. The value is calculated by an actuary and takes into account several variables such as life expectancy and interest rates.
The pension and commuting paths each have their advantages and disadvantages. I'll start by explaining the different routes, identifying your options and discussing some of the considerations you'll be faced with for each plan:
The defined benefit plan will provide pension income for life beginning at retirement. If you would rather have someone else do the worrying about your pension, this approach could be for you. It can offer a sense of stability and security.
One major concern I hear when people are deciding between pension and commuted value is over the future financial viability of their employer. Pension legislation requires pension fund assets be separate from employer assets and therefore protected from the employer's creditors. A well funded pension plan will have sufficient assets to meet all the pension obligations if the plan were wound up. Some provinces have taken additional measures to help protect pensioners.
In Ontario, for example, if there are insufficient assets to pay all the pension obligations, the Ontario Pension Benefit Guarantee Fund (PBGF) will guarantee the first $1,000 of your monthly pension income. It is generally a good idea to check your annual pension statement to review the pension's funding position.
Inflation indexing: If your pension plan offers adjustments to pension payments to account for rising costs related to inflation, it could provide significant value because it provides some protection against inflation through your lifetime. Not all pension plans are indexed to inflation so it is wise to carefully examine what yours provides.
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How long does it take you to completely unpack after moving in?
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- 3 days – I'm an unpacking MACHINE!
- I need a full month just to figure out where to put everything!
- 3 months – I use the boxes as end tables!
- NEVER! I still haven't unpacked everything from the last move.