Dealing with a work pension can be the first big investment decision for young people

In the fall of 2021, Krista Lehman, 39, quit her job as a program assistant at a Vancouver post-secondary institution to take a break from mental health and pursue other career options.

In regards to your defined benefit pension plan, your employer’s human resources department provided you with a package that offered you the option of taking the commuted value of your pension, a lump sum based on an estimate of what it’s worth. now the future pension. or keep the money in his pension plan until 2047, when he would start receiving monthly payments.

“I was surprised by how much money he had,” Lehman said. “I have never had this amount of money in my bank account before.”

For millennials who haven’t yet had a chance to invest outside of mandatory employee pension contributions, figuring out what to do with a pension plan after leaving a job can be daunting.

In the case of Lehman, he felt that having autonomy over how to invest his money was more attractive than leaving it to his former employer.

“I wanted to be a more active participant in my savings and retirement planning than I had been in the past, so I felt like this was an opportunity to do that,” she said.

“I also wanted to make ethical decisions about where my money is.”

Lehman took the full value commuted, putting nearly 50 percent in a locked retirement account (LIRA), about 33 percent in a registered retirement savings account, and withdrew the other 17 percent to handle ongoing expenses. , like a new computer.

Each employee will have their own set of options when they leave a job, and those options will differ even more depending on whether they have a defined benefit pension plan or a defined contribution plan, said Liz Schieck, a certified financial planner at the New School of Finance. in Toronto.

Deciding what exactly to do with a pension can be overwhelming, Schieck added, so he advises clients to take some time to think it through and seek the advice of an unbiased financial planner if possible.

When it comes to defined benefit pension plans, Schieck sees clients often deciding between leaving the pension with their employer, transferring it to their new employer’s pension plan, or taking the pension and investing it elsewhere.

In this situation, it all comes down to trust and comfort levels. “Some people may feel more reluctant to invest it in the market, while others may feel less confident about a pension,” Schieck said.

In the latter case, those in their 20s and 30s may not feel confident that a business will continue to exist when and during their retirement.

For those who decide to take the pension with them, putting that money in a LIRA and the remaining money in an RRSP if you have room available, means it won’t count as taxable income. However, if you don’t put the remaining funds, outside of a LIRA, into an RRSP, you’ll receive a check and that money will be taxable, Schieck said.

If someone is burdened by student debt, that money can make a big difference in helping pay it off.

But the decision to put it on an RRSP or take the tax hit isn’t the same for everyone, Schieck said.

“It depends on what tax rate you are going to pay, what tax bracket you are in, what debt you have, what the interest rate is and what other saving capacity you will have in the future. That’s why it’s great to get advice.”

When it comes to a defined contribution plan, the decision can sometimes be simpler because there are fewer options. The defined contribution plan already acts as an investment account, Schieck said. There is a set amount of money you can keep in the plan or invest in a locked account elsewhere. There is also the option of purchasing an annuity, but it is a much less popular route.

When you leave a job with a defined contribution plan, the decision to take your pension depends on what products you want to invest in and where, Shieck said.

For example, those who take the pension may feel more comfortable keeping their investments in their own bank, or want to be more selective with their investments, like Lehman, who wanted to make sure their investments were ethical.

This report from The Canadian Press was first published on March 22, 2022.

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