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What is a Defined Benefit Pension Plan? | How Company Pension Plan Works? - YouTube
Channel: Thomas C Chan - Financial Services
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Are you familiar with your employee’s benefits?
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And especially if you are working with
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the government or the big companies,
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Do you understand
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what kind of retirement plan you have?
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Over 4.3 million Canadians were covered by
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a defined benefit pension plan in 2019.
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And if you are part of 4.3 million,
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do you know what you get upon retirement?
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In this video
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I’m going to help you understand more
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about your company pension plan
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For example,
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what affects your pension benefits,
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will your spouse or your beneficiary able to
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keep your pension plan if you pass away.
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Or what happens if you quit your job,
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can you move your pension over.
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I will go over all the questions above
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So you know exactly how that
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contributes to your overall retirement plan
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Hey! Welcome back
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This is Thomas
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Here to help Canadians make better choices
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On Retirement Wealth and Insurance
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My goal is to make sure you take home 1 or 2 ideas
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And start making better financial decisions today
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If you found this video valuable
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Please consider subscribing
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so you will never miss any of my videos
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Now let’s get started!
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In Canada,
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there are two types of
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employers sponsored pension plans
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First one we have the
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defined contribution pension plan
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This plan is where you know
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how much you pay into the plan,
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you have a freedom of choice
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on where you invest but,
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but the result is not guaranteed.
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Compare to the other one,
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the defined benefits pension plan
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which is what we focused today.
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As the name suggested,
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you pension paid out is guaranteed.
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You know exactly how much you going
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to get per month during your retirement.
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Now how does it work?
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Well, most of the time you and your
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employer will contribute to the plan together.
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And the pension plan administrator
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invests and manages the fund.
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The longer you stay in the company
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and the higher income you are,
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the higher the pension payout.
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And even though you don’t have a say
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where you want to invest this money,
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No matter the market goes up
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or down in the next 30 years.
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You are guaranteed with a fixed retirement payout.
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And that’s why,
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when I was young,
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my parents always wanted me to work
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with big corporations or the government.
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Anyway,
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there are a few flags to be aware of when
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you have a defined benefit pension plan.
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First of all,
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most of these plans are not indexed payout.
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An indexed plan is where the amount
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you get may increase on a regular basis
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With the intention to help you cover your living
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expenses when the overall cost of living increases
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But as I said,
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only a handful of pension plans are indexed.
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So if you are planning to retire early
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then you need to make sure
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you don’t just rely on this income source.
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And speaking early retirement,
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the earliest you can access
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the pension package is at age 55.
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and if you do retire between 55 years old
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and 65 years old,
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in addition to your pension income,
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You will receive a bridge benefit that is payable
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from your early retirement date until 65.
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Because by age 65,
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you should be receiving cpp and oas as well.
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So again,
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if you choose to start withdrawing at age 55,
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you will get a bit more,
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then by age 65,
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the pension payout will be reduced.
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There is a whole bunch of calculation to calculate
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the bridge benefits and the actual amount you get.
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But I think the easier way is
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to talk to the HR department.
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And usually by 54,
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they will send you a statement to give you an update.
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Let’s talk about what happens when you choose to retire,
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it depends on your provider,
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but normally you have two options for your benefits.
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You can opt for a single person pay out
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Or you can opt for a joint payment
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With a single person payout,
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the plan only pays you and you only.
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meaning if you pass away,
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Unfortunately your spouse would not get any payments,
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all the money is left over will go back to the plan.
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With a joint payment on the other hand
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You will get less retirement payout,
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but your spouse will be entitled to
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get your benefit when you pass away
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The less you get for your pension payout,
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the more benefits your spouse get when you pass away.
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And here is an example,
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Say John works in a bank for many years.
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And now he wants to retire.
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In the pension packages,
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he has couple options
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If he is single,
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he has two choices
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Option A) payable to John only for John’s life,
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but in the event of John’s death,
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his pension payment will cease.
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Or Option B) payable to John for 10 years,
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if John passes away within those 10 years,
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the remaining will pay to john’s beneficiaries.
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but if john is still alive after 10 years,
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the pension payment will be reduced.
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Now what if John is married,
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then he has another 2 choices
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First option,
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he gets 100% of the benefits,
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but if he passes away,
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the surviving spouse get 50% of the payout.
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Second option,
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he gets 90%, and spouse get 90% as well.
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Notice that in these scenarios,
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if both john and the spouse pass away,
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or if the spouse passes away first.
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Then all the remaining benefits will
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go back to the plan.
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This is extremely important and make sure
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you triple check your pension package
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as each carrier has different terms.
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Now you may ask
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What happens if I quit the company?
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If you quit, there are a couple of options
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You can choose to leave the plan there and let it grow.
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You don’t touch it until
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the day you retire and get a payout by then.
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However,
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usually the payout will be extremely small.
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Or you can also transfer it to a new pension plan
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but only if the new company has pension plan as well.
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Or the last option is you can transfer it
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to your own LIRA
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Which is a locked in registered account
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As the name suggested,
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this account is lock in and you cannot touch this
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until you reach age 55 or unless you are in
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a financial hardship or severe disability.
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Once you switched to a LIRA account,
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you have the ability to choose your own investment.
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So therefore,
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if plan and done right,
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you should have a higher return compare to
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a traditional pension plan.
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And also, for most of the LIRA account,
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you can name a beneficiary which means for sure
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your hard-earned money will only stay within your family.
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But let’s talk about the downside of a LIRA account,
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similar to RRSP and RRIF,
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By age 71,
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you need to convert to LIF account,
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short for Life Income Fund.
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And the biggest difference between LIF and RRSP,
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where RRSP or RRIF you can choose to
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take the whole amount out if you want to
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versus for LIRA / LIF,
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it has a maximum annual withdrawal limited
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based on the province you are in.
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so say if you have a medical emergency
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and you need money,
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you cannot take more from the LIF account.
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lastly,
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since you choose your own investment vehicle in LIRA,
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then you are responsible for your own risk.
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And something to keep in mind
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about pension transfer to LIRA.
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It’s not a complete dollar to dollar transfer
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like tfsa/rrsp transfer where there is no tax implication.
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If you do want to initiate the transfer,
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usually the pension provider will let you
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transfer 80% to 90% into your LIRA.
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And the remaining 10 – 20% will be
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pay to you in cash and that will be count
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towards your income for that year.
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Sometimes this is a good way,
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because now you can access some of
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the money to pay off debt or invest in other area.
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And if you have enough RRSP room,
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you can put that cash in there to fully offset it.
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Lastly, what happens to my pension plan
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if I die before retirement?
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If you were not eligible to retire at the time of death,
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Then your spouse will be entitled to the
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commuted value of your retirement income
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Which is a lump sum of
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the present value of benefits accrued
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But they would have the following options:
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They can transfer it to their pension plan of their employer,
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but only if the employer agrees to accept it
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Or they can transfer to a locked-in RRSP or similar plan
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As I mentioned before,
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all these Plans vary by employers
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So it’s important to go over your benefit package again
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and also speak to HR should you have further questions
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Or if you just quite your job,
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and you still have a rrsp or a pension plan with your
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previous employer and not sure want to do with it
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Let’s have a chat!
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There’s a link below for you to book a
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complimentary consultation with my team and I.
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We can review your plans to see if they’re on track
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and what’s the best option for you!
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Anyway,
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I hope this video has provided you with an overview
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of how typically a defined benefit pension plan works
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And if you like this kind of content,
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please leave me a comment and
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give this video a thumbs up.
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It helps with the YouTube algorithm
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to promote to more people.
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This is Thomas!
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I will see you in the next video!
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