In Part I and Part II I provided a “birds-eye view” of the common termination packages and focused in more detail on the Retiring Allowance (Severance Pay). In Part III, I would like to review pension options within the termination package.

Pension Related Options

Unlike a retiring allowance, you could be given these options in a separate package that you might receive right away or, in some cases, 2-3 months down the road. The choices that you will be asked to make in that additional package will affect your financial wellbeing for decades, so they are worth studying.

With your employer you could be eligible for some of the following types of pensions (or even all of them – if you are lucky!):

  1. Defined Benefit pension.
  2. Defined Contribution pension.
  3. Group RRSP.
  4. Share Ownership Plan (sometimes called ESOP).
  5. Deferred Profit Sharing Plan (DPSP)
  6. Individual Pension Plan (IPP)

Defined Benefit Pension Plan

This type of plan usually exists with large employers and offers a pension benefit, which is known in advance. If you have this plan, you should have received regular statements showing what your expected pension will be based on your salary and years of service. Often the statement gives an early retirement date. If you elect to retire at this specified date, you may receive a reduced pension payment.

If your employer terminates your contract, you usually have three choices regarding the Define Benefit Plan:

  1. Leave it with your current employer until your normal retirement date or the early retirement date. This option specifies the amount of the payment you will receive and the guarantees to your surviving spouse.
  2. Transfer it to the Registered Pension Plan (RPP) of your new employer – if you already have one. In this case it becomes part of another Defined Benefit Pension Plan with its own provisions and guarantees.
  3. Take it in a lump sum (commuted value) and transfer the funds into a locked-in vehicle (for example a LIRA). Some employer’s pension plans may allow an additional lump sum to be transferred to a non-locked-in vehicle like regular RRSP.

The first two choices mean that you keep your pension in the form of an income stream beginning at a future date. It can be a very tempting choice because it is secure. If a solid company promises you $438/month starting at your normal retirement age, chances are this won’t change. No need to worry about market performance, investment choices, or other details.

But what if you happen to die too soon – how much will your spouse get? Or – what if it is possible to get higher monthly payments with the same money? It brings us to the lump sum or commuted value option. Sometimes it is viewed as a riskier option – you have to deal with market fluctuations and investment management. On the other hand, if you happen to die, your spouse or your estate gets the entire amount of money. The choice becomes difficult: should I select the guarantee of a monthly payment in the future or the certainty of an entire lump sum today? The interesting fact is – you don’t really have to make a choice.

Insurance companies, unlike banks or other investment companies provide the benefit of making a guaranteed income stream out of the lump sum payment. You can always take a commuted value from your employer and get a few quotes from different insurance companies asking:

  1. If I give you this money, what kind of monthly payment can I expect when I turn 65? Or 60? Or 55? Or any other age you have in mind?
  2. What kind of guarantees can I get for my surviving spouse?
  3. If I get into a difficult situation, can I make a lump sum withdrawal even though I am supposed to receive monthly payments?

If you don’t feel comfortable doing the leg work yourself ask your financial planner, they should do it free of charge. I provide this service for my customers all the time. In 90% of the cases I am able to find a better deal in all 3 areas – it is definitely worth shopping around!

If you don’t want to consider a monthly payment option at all and are comfortable with transferring out and managing the lump sum, insurance companies still can provide you with valuable principal and maturity guarantees that banks and credit unions cannot.

So if you want one short and simple takeaway from this topic: Don’t make any selection in the Defined Benefit Plan option before checking with a 3rd party insurance company.


Defined Contribution Pension Plan

The termination choices are very similar to the Defined Benefit Plan. The moral of the story is exactly the same – shop around with 3rd party insurance companies.

Group RRSP and Deferred Profit Sharing Plan

These options are usually very straight forward. You can transfer this money to your RRSP. There are different Government forms to transfer Group RRSP and DPSP but the end result is identical: they both become part of your RRSP without depleting your RRSP deduction limit.

Share Ownership Plan

This plan could be a combination of registered (RRSP) and non-registered (open) money. Since both parts are invested in the common shares of your ex-employer, you have to have (or open) brokerage accounts to transfer them out. Sometimes you are even allowed to keep the accounts with the broker that was servicing your company. In other words, change might not be required at all.

Individual Pension Plan (IPP)

It is a somewhat exotic option usually offered to the executive officers of the company. It is a personally tailored Defined Benefit Pension Plan. The rules regarding IPPs are complex. I am not going to go over it in this article – it deserves a publication on its own. However, if you happen to have the IPP and your employment has been terminated you absolutely have to consult your financial planner AND your accountant before making any decisions.

That concludes pension related options in your termination package.

In the upcoming Part IV we are going to go over the continuation your health and dental benefits, as well as the group life insurance.