Early Retirement

Pension Payment Options

When considering a retirement package, you are generally given four options regarding the company pension plan:

1. To remain in the company pension plan (with no further contributions) and receive a pension at a future date. Depending upon factors such as the pension's indexing to inflation, remaining in a plan may be advantageous.
   
   Sometimes, early retirement packages will offer pension inducements (i.e. will give you added years of service) depending upon your age and position. This can make the pension option more appealing.
2. Transfer the vested pension (lump sum) amount to a new employer's pension plan. The vested portion of a pension is an amount that is considered to be owing to you.
   
   The transfer of pension benefits to a new employer's pension plan will be limited by a new employer's willingness to assume additional pension liability.
3. Use the lump sum pension amount to purchase a deferred annuity.
   
   The income provided by the purchase of a deferred annuity should be compared with the projected income provided by the other available options. Remember that when you purchase an annuity, you will not have any control over the management of the money, which, depending upon your wishes and ability to manage money, may or may not be a disadvantage.
4. Transfer the commuted (lump sum) value to a locked-in RRSP [or Locked-in Retirement Agreement (LIRA)]. The transfer of the lump sum value to a locked in RRSP or a LIRA is often considered to be the most advantageous of the available options.
   
   This option allows you to retain control of the investment of these funds and allows the flexibility of deciding when you would like to begin accessing this capital (within certain restrictions). It may be possible to achieve higher rates of return since you can invest the funds yourself, versus a pension plan that is investing for all its members and has a more limited number of investment options.

When analyzing which pension option is best suited for you, there are a number of factors that should be considered:

Which option will provide you with the best cash flow throughout your retirement?; Which will provide the largest benefit to your spouse or to your estate upon your death?; And finally, you will need to make a number of assumptions on where you think long-term interest rates, investment rates of return, and inflation are headed to help you decide the option you feel is best for you.

Pension Adjustment Reversal (PAR)

If you choose to transfer the commuted (lump sum) value of your pension to a locked-in RRSP or LIRA you may end up with more RRSP contribution room than you previously thought. You may be able to recover some of the RRSP contribution room that was lost in previous years as a Pension Adjustment Reversal (PAR).

If the amount you received upon withdrawing from the pension plan was less than the sum of all the pension adjustments reported on your T-4 slips for all years of employment since 1991, then the difference is your PAR and it will increase your RRSP room for future RRSP contributions. If the PAR applies, then your former employer will do the reporting of this difference shortly after your withdrawal from the pension plan. A PAR can also arise from the termination of a DPSP plan.