Thinking about retiring soon? Are you a member of a company pension plan? If the answer to these questions is yes; you are likely going to be facing some important decisions. Decisions which are often irreversible once made.

Many company pensions are defined benefit plans. That means when you retire the pension plan agrees to pay you a specific pension for your lifetime. The benefit amount is determined by reference to your income during employment and the length of time you were a member of the plan.

The first question to be answered is whether or not to remain in the plan and receive the monthly benefit or to withdraw the estimated current value of the future payments also called the commuted value of the plan. Many, but not all, plans allow you to receive a lump sum payment; much of which can be transferred into a Locked In Retirement Account (LIRA) without immediate tax consequences. In some cases a portion of the payment will have to be included in income in the year of receipt.

This option provided certainty in that the funds belong to you and can be transferred to your beneficiaries in the event of your death. It also gives you some flexibility around the timing and amount of income you receive from the LIRA.

Choosing this option will mean that you have responsibility to manage the investments held in you account and market conditions could have a significant impact on your retirement capital. For many, this will be viewed as an advantage while for others it would seem too risky.

Funds in a LIRA can also be used to purchase an annuity which will pay a specific amount for either your lifetime or a specific period of time. This option provides certainty as to income and removes the risk of market volatility.

If you choose to receive a pension from the plan you will be asked to decide among a number of alternatives. If you have a pension partner (as defined by your plan) payments will likely continue to that partner in the event of your death. This survivor benefit is often a reduced amount to reflect the cost of providing payments for a longer period than would be the case if there were no survivor benefit provided. In Alberta this survivor benefit cannot be waived without the written consent of the pension partner.

Generally pension payments cease with the death of the pensioner or her surviving pension partner but you can choose a benefit that is guaranteed to be paid for a specific period of time or until death, whichever is longer. The guarantees can be for varying lengths of time and insures that some residual benefits will continue to the beneficiaries of your estate if you and your pension partner should die within the guarantee period. Each option will result in a different pension benefit as there is a cost attached to providing certainty for a specific time period.

The best alternative is different for each retiree and depends on many factors; such as the value of their other retirement assets, their desire to control the retirement funds and whether or not the pension partner has a pension or retirement assets of his or her own.

These decisions are not easy ones to make and, in my experience, pension plan information is often not very clear or easy to understand. Your investment advisor will be happy to assist you by interpreting and explaining the alternatives to you. In many cases you will be able to make the appropriate decision with your advisor’s help; however, in some instances a comprehensive financial plan may be required in order to make the best choice for you and your family.

Ask Jim about our financial planning services.