You’re leaving your job. Now you need to decide: do you keep your employee pension or take a lump-sum pension payout?
When Toronto-based marketing professional John Tabone left his job of 19 years with a national professional association, he had to decide what to do with his defined benefit employee pension.
He could leave it alone and receive about $16,000 per year in retirement, or take a lump-sum pension payout of its commuted value and invest a portion in a locked-in retirement account (LIRA), with the balance received as cash.
The deferred annual pension would be guaranteed for life but, given that this pension would not be adjusted for inflation, if inflation were to rise considerably, in 20 years $16,000 may not seem so much. It’s also worth mentioning that if John took the lump-sum pension payout, invested it and then the markets were to collapse, he could end up with a lot less money.
John’s dilemma isn’t unique: figuring out what to do with an employee pension after a job change can be challenging. There’s no single correct answer because everyone’s circumstances are different.
It could pay to consider the following steps before deciding whether to keep, exit or transfer a defined benefit or defined contribution pension plan.