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How Do You Leave A Defined Benefit Plan? | Your Money, Your Choices with Susan Daley - YouTube
Channel: Susan Daley
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Changing employers by force or by desire can
make a huge impact on your financial life.
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I outlined some financial considerations when
leaving an employer in my previous video
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âSwitching Employersâ.
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Today Iâll be focusing on what to do with
your Defined Benefit Pension Plan when you
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leave your current employer.
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Iâm Susan Daley and this is Your Money,
Your Choices.
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When you resign or are let go from a company
prior to retirement, you have to make a decision
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around what you would like to do with your
current employer pension plan.
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You will receive a letter from your pension
administrator giving you the relevant information
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to select an option for your pension plan.
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Once you receive that letter you have a certain
period of time to make a decision, otherwise
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youâll be stuck with the default option.
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The letter often indicates this deadline.
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This is why it is important to change the
address on file if you have left your employer
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in order to take a job in a different city,
so you donât miss this deadline.
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So what are your options when
you leave your employer?
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1. You can keep the defined benefit pension plan
and collect your benefit upon retirement.
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This is usually the default option.
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Your benefit is calculated using your current
years of service and your current salary and
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wonât increase since you wonât be adding
more years of service.
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Watch my previous video on Defined Benefit
pensions for a review of these types of plans.
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2. You may be able to transfer your pension plan to
another employer pension plan.
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3. You can transfer your benefit out of the plan
into an account at a financial institution.
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Youâll most likely have to transfer this
into a Locked-in Retirement Account (LIRA)
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unless your accumulated pension is small.
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There also may be an excess of funds you are
entitled to that can't be transferred
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into a LIRA.
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You will be taxed on this amount as regular
income in the year itâs paid out, unless
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you have sufficient RRSP room
to transfer it over tax-free.
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Hereâs an example, letâs say the taxable
portion that cannot be transferred to a LIRA
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is $20,000 and your salary is $60,000.
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If you have no RRSP room, youâll have to
pay tax on $80,000 in income that year.
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If you have sufficient RRSP room, you can
transfer that $20,000 to your RRSP and your
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net income is only $60,000.
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You can learn more about RRSP contribution
room in my video
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RRSP Deduction Limit vs. Contribution Room.
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The option you choose will depend on a number
of factors, which Iâll outline here.
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The first consideration is whether you will
be eligible for certain benefits if you receive
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a retirement pension.
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For example, many government pensions offer
health care benefits to retirees.
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Youâre only eligible for this if you keep
your defined benefit pension within the plan
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and donât transfer it out.
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Receiving health care benefits in retirement
could drastically improve your retirement
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finances if you are eligible for things such
as home care in old age that you would otherwise
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have to pay out of pocket.
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There is a risk that the government may come
under pressure from taxpayers to remove this
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expensive benefit for government employees.
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The second consideration is the financial
health of the company you are leaving.
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You need to be confident that the company
will be around for a long time and be able
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to keep up with their pension benefits.
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If the company goes bankrupt or gets into
financial trouble, they may not be able to
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top-up the plan and you might not receive the
benefits initially promised to you.
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Sears is a good recent example of
retirees being shafted.
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The third consideration is whether you think
you can outperform the retirement plan by
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investing on your own.
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If you are a very conservative investor, then
this is unlikely.
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Even if you are a more aggressive investor,
be sure to use realistic expected returns
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when estimating how you might compare to the
pension plan.
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10%? That's not reasonable, especially
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if you reduce your risk over time as you get
closer and into retirement.
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Iâve linked a paper outlining what PWL uses
for their expected returns
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in the description below.
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Defined Benefit pensions offer lifetime income
no matter how long you live, and often provide
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survivor benefits and inflation protection.
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Pension plans are able to pool this risk,
so if you live longer than expected thatâs
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offset by those who have died earlier.
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If you live longer than you expect and you
transferred your plan into a LIRA,
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you may be out of luck.
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Finally, the last consideration is convenience.
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If your benefit is going to be small in retirement,
you might just prefer pooling the commuted
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value (the lump sum you receive if you transfer
the pension out) with other investments you
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or your advisor manages.
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This way you donât have to worry about different
little retirement pieces all over the place
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and can better keep track of your retirement savings.
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As you can see, the decision to keep your
Defined Benefit pension in the plan comes
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down to a number of factors.
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Your current age can also drastically change
which option is better from a numbers standpoint.
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If youâre in this situation and need help
making a decision, feel free to let me know
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in the comments below.
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Iâm Susan Daley and this has been Your Money,
Your Choices.
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If youâre watching this on YouTube, be sure
to subscribe and click the bell to receive
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notifications of upcoming videos.
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Speaking of upcoming videos, in my next episode,
Iâll be looking at the decision to transfer
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Defined Contribution Pension Plans.
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