Should you cash out your pension?

5 minute read

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You’re well into your career, but you’re thinking of making the change to a new job, or even a new employer. You want to take the leap, but something stops you in your tracks: your pension.

If you’re over 55 and looking to leave your employer or change careers, what should you do with your employer-provided pension? While there isn’t a strictly black and white answer that will tell you what to do, knowing your options as to how you can redistribute an employer-sponsored pension depends on the plan terms, regional regulations, age, health and financial situation can certainly help you decide what to do.

Traditional employer-sponsored pensions generally fall into one of two categories:

Defined Benefit Pension Plans, based on your salary and years of service, provide guaranteed payments from the employer after retirement. While your age may allow for early collection, these plans generally don’t provide a cash-out option.

Defined Contribution Pension Plans, based on contributions and investment performance, are typically more portable with options to transfer to another retirement account, convert to an annuity, or request a lump-sum redistribution.

Determining your pension options

1) Review your employer plan for terms, payout options and potential penalties. Many pensions require funds to stay put or restrict transfers to a Locked-in Retirement Account (LIRA) or another employer-sponsored pension. Some allow you to start collecting your payments early if you are 55 and over. Occasionally a portion can be cashed out—see below.

2) Understand government regulations for unlocking options. In extreme circumstances of health or financial hardship, such as high medical costs or a shortened life expectancy, you may qualify through the BC Financial Services Authority to unlock funds.

3) Canadian residents who are 55 and over have more unlocking options:

Within 60 days of transferring funds into a Restricted Life Income Fund (RLIF), you could exercise a one-time option to unlock 50% of your pension.
If your pension’s value is less than 20% of the year’s maximum pensionable earnings (YMPE), you can request a small benefit refund in the form of a taxable cash payment or RRSP transfer, or an untaxed monthly payment.

4) Consult a financial advisor about your options. They can help you discern what makes the most sense for your individual retirement plan.

If you are able to take a lump sum payment, how will that be invested for a higher return and future payment than if you left them in the pension?
What are the tax implications of taking pension payments early, retaining the existing plan, moving to an RRSP or LIRA or even cashing out?
Would you benefit from taking an available 20% or 50% cash payment to help pay down high-interest debt or pad the emergency fund?

The Pension Playbook

Use this overview of Canadian pension and retirement savings options to guide discussions with your financial advisor.

Defined Benefit Employer Plan	Contributions pooled into an employer-guaranteed fund Calculated based on salary and years of contribution Typically paid out in a monthly annuity, with some allowing lump-sum transfers to your new employer’s plan or a LIRA
Defined Contribution Employer Plan	Performance of invested contributions determines retirement income More flexibility to move funds to an RRSP, RRIF, or annuity If plan value is proportionately low and you're over 55, potential for cash withdrawal and reinvestment in an unlocked RRSP or RRIF
LIRA: Locked-In Retirement Account	Workplace pensions often mandate converting to a LIRA Similar to a locked-in RRSP You can’t contribute or withdraw until you retire (earliest age 55) when funds transfer to a Retirement Income Fund (RIF) or annuity
CPP: Canada Pension Plan	Federal plan starting as early as age 60 Payments based on prior income-deducted contributions Includes disability, survivor, and death benefits
OAS: Old Age Security	Federal plan starting at age 65 Based on years lived in Canada since age 18 Funded by federal taxes, no contribution required Includes Guaranteed Income Supplement (GIS) for low-income OAS recipients
RRSP: Registered Retirement Savings Plan	Not a pension, but a tool for retirement savings Contributions are tax-deductible within defined limits Conversion to a taxable RIF required before age 71 Flexible investment options: stocks, bonds, mutual funds, and GICs
TFSA: Tax-Free Savings Account	Not a pension, but a versatile savings tool Federal plan with contribution limits Contributions not deductible, but withdrawals are tax-free Money is not locked in and contribution room is reusable Flexible investment options: stocks, bonds, mutual funds, and GICs

Mutual funds and other securities are offered through Aviso Wealth, a division of Aviso Financial Inc. Please read the prospectus before investing. Unless otherwise stated, mutual funds, other securities and cash balances are not covered by the Canada Deposit Insurance Corporation or by any other government deposit insurer that insures deposits in credit unions. Mutual funds and other securities are not guaranteed, their values change frequently and past performance may not be repeated. The information contained in this article was obtained from sources believed to be reliable; however, we cannot guarantee that it is accurate or complete. This material is for informational and educational purposes and it is not intended to provide specific advice including, without limitation, investment, financial, tax or similar matters.