On this week’s episode of “Heart of Our Money Talks,” I’m digging into pensions—the pros and cons of switching where and how your pension money is living. In recent years we have seen companies starting to change up their pension plan structures and move away from defined benefit plans, which can cause employees to have to make some complicated decisions about what they want to do.
There are also things to consider if you’re changing companies and have an existing pension at one job – do you consolidate them or keep them separate? Is it even an option to consolidate them?
If pension changes are on your mind or you just want to learn more about them, give episode 35 a listen now.
Hey there. Welcome back to, “Heart of Your Money Talks”. This is episode 35. Let’s talk about pension plans. I have seen so many employers switching up their pension plan options. COVID brought changes to companies – maybe they’re trying to be a little bit more cost-effective. Maybe that’s the reason the trend is the move away from defined benefit pension.
So a defined benefit pension. That’s the life annuity pension that pays you monthly, no matter what, for the rest of your life. They are expensive to manage and the employer takes on all the risk with them, therefore there’s a move away from them. We’ve seen in the last 20 years, there’s just less and less.
In a few situations. I have seen the employer allowing the worker to choose which pension they want. They’ve got the defined benefit that’s a life annuity, and then they’ve started the defined contribution, which is the market investment, matching a percent of every paycheck that then the employer matches. The company that I’m thinking of is probably hoping to try and slowly phase out the defined benefit pension.
They’ll probably stretch it out over a few years and then down the road, this is just my personal guests, we will see that they’ll no longer have the two types to choose from – they’ll just transition everybody. The other big trend has been people leaving jobs, switching employers, or finding work from being laid off in COVID.
This has brought up pension discussion as well. It brings up the question of what to do with your former pension from your old job. If that’s the case, here are a few things to know. If you have a new job and a pension from your last job option – okay. In some cases, you may be able to transfer the invested amount of your old pension into the new employer’s pension plan.
This is possible only if a new employer is willing to accept that transfer. So you have to find that out first. For some people, it’s a good idea. If it’s a defined contribution then yes, a hedge fund and the new pension is managed really well. You could consolidate and not have all these little small amounts lingering everywhere at different places over your working years.
So you can imagine if you change jobs a lot, you could have pots everywhere – and I’m starting to see that. They’re saying that millennials on average are going to have five to seven different jobs in their lifetime. So having that many different things means you’re getting lots of things in the mail. It’s hard to keep track of, and it’s just unnecessary, stressful and hard to manage.
So if you can, consolidate the defined contribution pension plan. So that’s the type that’s invested in the market and that matching percent from your employer and yourself. You could transfer it to your own financial institution as well. It would be in a locked registered investment account, and you’d be able to manage it yourself and invest it however you like.
So you’re in control of that. It’s a good idea for some, and I suggest you talk with a professional about the new pension plan options and how they’re invested. Quite often in a new job with a new pension, we actually analyze it all. I’m very familiar with the different defined contribution pension plans out there and I can actually give some advice about how you should invest it. Your employer-defined contribution pension plan isn’t going to just give you an advisor. They’re going to send you a form from one of the big major institutions and say, “Here, pick what, how you want to do.”
So get some advice on that, because we want to look at your whole picture. We want to see what else you have in your RSPs and your tax-free savings account. Let’s look at the total allocation and your diversification. Having your own investments is a great diversification, so transferring your other pensions, the defined contribution pension plans and consolidating it into your own investment account that you’re in charge of is an okay thing.
Then you’ve got your own investment conversation and you’re in charge. You’re in control. Now, if you think you’ll be moving jobs a lot, and you are given the choice between the two types of pensions, I suggest the defined contribution. This is because you can easily transfer it to either your new pension or to your own account with your financial advisor.
That other type – that’s that life annuity that pays you monthly, no matter what. It has rules and is most likely a taxable portion to you. If you choose to move it, we call it a commuted value. When you do that, you’re going to have to pay tax on a portion. There’s a formula that they use. So transferring a defined benefit pension will take some planning around the potential tax hit the payment for life versus your own investment risk and longevity. That is a calculation that an experienced certified financial planner should do for you and give you the pros and cons for your circumstance and huge for tax planning as well.
I am a pension geek I love and I follow pensions. Just to note here, defined benefit plans have tough solvency funding standards. That means the plans, assets, liabilities, and funding must be reported in 2008, 2009. A lot of pensions are underfunded and need to top up. So there were issues with not enough money in them.
Even through the pandemic and our correction that we had, the majority of pensions have done well, the pension health indexes are looking good right now. I was in my nerdy peace of mind, checking things out. Of course, I always hit up the Ontario teachers’ plan website. That’s a big popular one that we’ve all heard of.
It’s doing well. This is from their website. They have $8.6 billion net investment income generated. Yep. They’re doing just fine right now, but this is an example. These are things that you need to look at and consult an agency of a defined benefit pension, so you’re making sure that it’s managed really well as well. So if you’ve got the choice, you need to analyze it.
So my takeaway for you is this – if you have a handful of different defined contribution pension plans, lingering from different jobs, transfer them to your own account and a locked-in registered investment, or add them to your current pension plan, if you can get some advice on that. But try and consolidate. You could end up with higher returns, possibly better investment choices and just peace of mind by decluttering.
I am a huge fan of decluttering. Clean it. If you’re going to move jobs a lot and still feel like you’re going to be nomadic and know that you are not going to be in a job long-term and if you’re given the choice, choose the defined contribution pension. That’s it. Any questions? Send me a note.