Should I Transfer My Pension to a Financial Advisor?

Should you transfer your pension at retirement? It depends on 5 key factors. In this episode, Canadian CFPs Zena Amundsen and Nicole Putz break down the exact framework they use with clients to make this pension transfer decision, including real scenarios where they told clients to LEAVE their pension alone and others where they recommended transferring it.

Show Notes: Should I Transfer My Pension to a Financial Advisor?

Zena: Hey there. Welcome back. So Nicole, what are we talking about today?

Nicole: Well, we’re talking about coordination in the broader sense, and in a more dialed-in sense, pension income. What we want to do for you today, and the reason Zena and I actually thought long and hard about this one, is because this conversation comes up a lot with clients. We wanted to be very thoughtful and intentional on how we explain this to you guys, and we’re excited because we want to show you and walk you through how we think about pension decisions in real life and in the broader sense of retirement transition.

Zena: Yes. So someone will come into the office, and one of the very first questions off the hop is, “Hey, listen, I’m retiring. Should I just move my pension over to you?”

Nicole: Right.

Zena: Well, today we’re going to try and talk about this on a general sense, but it is a very personal thing. I think there are some key things that we can share with you that form the basis of a rationale. So if we give you a yes or a no, you need to be able to have the why behind that.

Nicole: Right. The understanding as to why, because there is a recommendation sometimes, and it’s going to depend on what your situation is. It’s unique. It’s a case-by-case thing.

Zena: But there are some general things we can share today that I think will give you an inside scoop. So you’re either thinking about it before retirement, or you are retiring and now it’s, “Okay, what do I do?” And those are the hottest topics, and that’s our specialty—retirement and pensions. So I think this is a good one to listen to.

Nicole: Yep.

Zena: And you don’t have to be at the pre-retirement stage. You could already be retired and still need to have this knowledge, and there might still be some changes.

Nicole: Yeah. You could even be pulling from a pension already, and this is still going to be relevant to you.

Zena: Yep. Completely.

Nicole: Yeah.

Zena: So we’re talking about defined contribution pensions, not defined benefit pensions. The difference between the two—really quick—defined benefit is that lifetime annuity that you receive. It’s a contract saying, based on your years of service, based on your income, this is the formula and this is what you’ll get each month for the rest of your life. Defined contribution is a matching program, and there’s an investment piece. At the pension that you’re at for that defined contribution, there is an investment choice that you probably went online on your own to make. HR sent you a link, and you’re doing the questions for your risk tolerance, and then you get a choice out of a couple of funds or something to choose from where your contributions off your paycheck go in, and then your employer matches. That’s the one we’re talking about right now. Because defined contribution means that there is an investment, there is market risk in there, and you are in charge of it after retirement.

Nicole: That’s right.

Zena: And where it lives.

Nicole: And where it lives.

Zena: And you have options, and you’re not going to pay a tax penalty if you move that pension when you retire over to your own portfolio, or you can leave it there. Those are the two options: leaving it there or moving it. And that’s what I think we want to dig into—some of the factors to consider.

Nicole: Yep. So even before the pension—and in client conversations, even before the pension—the pension can be the primary lever of decisions we’re going to be making or talking about. But we take a step back, even from the pension. We say, “Okay, listen, from an income standpoint, what are all the different incomes that we’re going to be coordinating in your retirement?” So again, whether you’re in retirement or close to retirement, this could be what’s going to be guaranteed to cover your expenses versus what’s going to be the flexible pool—the things that we can turn on and turn off depending on what you need.

Zena: Some of those things that you’re talking about are CPP, Old Age Security. Do you have tax-free savings accounts? Do you have RRSPs? Do you have another pension?

Nicole: Are you working in retirement?

Zena: Do you run a side business?

Nicole: Do you have a side hustle? Exactly. There’s actually, in retirement—it’s funny—I think there is maybe this sentiment that things get less complex, and actually we’re here to tell you that there is a little bit of complexity that you have to be thinking about, especially when it comes to coordinating. We’ll get into it too, but there are these income sources and where you’re pulling income from and how you’re covering your daily life in retirement, but then also the tax consequences because that’s really significant.

Zena: That’s actually the revolving wheel of everything behind the scenes. The little tax mouse running around on the wheel out of everything we do.

Nicole: That’s right. Yeah.

Zena: Out of everything we do.

Nicole: Yes. Exactly.

Zena: Have we named that? I don’t know—George, our tax hamster?

Nicole: Yeah. I like that. I like George. Little Geo. Little Geo, the tax hamster.

Zena: Oh my God. Can’t shake it now. Okay.

Nicole: Very good. Anyway, so yeah, that’s kind of the kickoff. It’s, “Okay, what income do you need?” And then we start to have the conversation of what needs to be flexible, what’s going to be guaranteed coming in? And Zena has already hit the CPP, the OAS, the multiple pensions, the RRSPs, the TFSAs, all of those things.

Zena: Which one’s flexible, which one’s not, and which ones are guaranteed? That’s the CPP and OAS. Okay. Those are our defining ones that we know won’t change. Or maybe you have a defined contribution—this one we’re talking about with matching—and maybe you have a defined benefit from a previous employer that’s going to play into it. And so which one of the levers can we pull on and off and when?

Nicole: That’s right. So once that conversation’s been had and we kind of have a better idea of, “Okay, now we know what you’re going to need, potentially,” this is the part where Zena and I are going to say the quiet part out loud here. Does it actually make sense to bring your pension to your financial planner, or does it make sense to leave it there?

Zena: So let’s talk about that. Yeah. Because this is a hot topic, and there is this wariness, and I think it’s rightfully so.

Nicole: Yeah.

Zena: You have to be educated, know all the whys. If someone’s saying yes or no, but there’s a hesitation because you know that there are advisor fees. And so one of the reasons of thinking, “Oh, well this recommendation is just because you want to manage my money and make money off of it.”

Nicole: Yeah.

Zena: And so that’s okay. You have to think about that.

Nicole: Of course.

Zena: And so that’s one of the defining factors is fees. A defined contribution, even to sit there, it’s in a product, an investment product. Big institution, the six famous banks that we know of have institutions, or there are the provincial pensions. They all have a fee behind the scenes. Every product does. And we call that the management expense ratio, and that’s just to manage the fund. That is a fee that you will see published and you’ll know, and it’s usually a percent—it’ll be 0.5% to 0.9%, maybe in there, percent behind the scenes. Okay, so I’m going to go a little bit deeper than I wanted to, but it means that if the fund made 5%, it actually made 5.8% if there was a 0.8% management fee there. And so you just have to know that. And if there was a negative 5% year, it means it only had a negative 4.2%. That’s just an example. I hope I didn’t—you know, eyeballs are going, “Oh my God, math.”

Nicole: But this is important.

Zena: It’s just a fee behind the scenes, and we’re cognizant of that, and we know that, and every product has it, unfortunately. It’s just how—to make money, you have to manage it, and there’s a fee to that.

Nicole: Right.

Zena: So let’s talk about that. Defined contributions will have a fee in there to manage it—the product.

Nicole: That’s right.

Zena: And that’s no different than here, but where the fees change is if you move it to your advisor, now you’re going to be paying that advisor fee—the 1%—and hopefully that is transparent and you can see it every month. And so now, the automatic default of someone is, “Why would I pay an advisor fee on top of that? I’m just going to leave my pension where it is.”

Nicole: Especially because in accumulation phase, so over your building years, the pension’s been working very quietly in the background. It probably hasn’t been at the forefront of your decision-making yet. You’re just adding.

Zena: Adding.

Nicole: Exactly. You haven’t had to pull the income lever at this point. Yeah. So now this decision is coming up, and you’re thinking, “You know what? The pension’s just been sitting where it is, has been doing okay.” Some of you might be thinking it’s what I know.

Zena: It’s what I know.

Nicole: It’s familiar.

Zena: Yes. And it is managed. Okay. Yep. And so the default is to just leave it. And that’s where we do the pros and cons.

Nicole: Yes.

Zena: Because sometimes it is good to just leave it, and we actually say that.

Nicole: So let’s talk about that. Let’s talk about the pro. Where would be a good—if I was sitting across from you right now, Zena, and I’m a client and you’re like, “You know, after everything we’ve talked about and everything you’ve shared, you’re going to tell me that it actually makes sense for me to leave it where it is.”

Zena: Yeah. So here’s an example. This is a case study in the office—a live one. The first one that came to my brain is someone who had been working with the employer for 35, actually I think it was longer, years. Wow.

Nicole: Yeah.

Zena: Stayed on in a management role—fantastic—and retired at 70. I know that doesn’t happen, but we’re talking about young, youthful, loved their career. Just your awesome experience.

Nicole: Yeah.

Zena: And so had accumulated this defined contribution pension—quite large—and then taking into the age factor and knowing that there was simplicity there. This was the bulk of the pension. The only other one was Old Age Security and CPP, which we had delayed for a while because working years were very much higher in income.

Nicole: Right.

Zena: In this circumstance we said, “You know what, with us looking at it and the investment piece and doing our financial plan, you’re more than okay. And the only option here that you have is to turn on the minimum amount based on your age.” There’s a formula. Once you turn on the tap into your pension and you’re starting to take income, it turns into something that now is income—a retirement income fund—and the government has, based on at age 72, you have to turn on the tap and there’s a minimum amount. That was the plan because that was more than enough to suffice in life, and it was a very simple yes to save you management fees as an advisor, because I don’t need to do too much tax calculations. We don’t have to turn levers on and off and coordinate all these other things. It’s a very simple need.

Nicole: Totally. So what I’m hearing from you—you’ve said it a couple times and we’ve said it already as a through line in this conversation—coordination is a big key here, and complexity.

Zena: So we looked at everything else, right? And we said, “This is simple.”

Nicole: Yeah.

Zena: Let’s just turn on auto.

Nicole: Yep.

Zena: We know what you’re going to get every month, every year. And we know what the taxes are, and we just set it up.

Nicole: Right. So you guys might be knowing where we’re going to go next here. When it does make sense or when it might be a consideration to bring your pension to your financial planner is when coordination and complexity becomes a big part of the conversation.

Zena: Share—we were talking about a file, a client file, and your experience. Share that scenario.

Nicole: So what had happened is this—she came to us and she’s not quite 65 yet, and she basically said, “I’m going to be retiring in about six months, and I have all of these.” So she had three pensions, three different pensions from three different work careers that she had done. She was trying to figure out when to take OAS versus CPP or if she should hold and delay. She is also kind of dabbling in contractor work, so she’s going to become a consultant. And so she was trying to ask the questions, trying to figure out, “I’m going to have this income coming in, so how does that also marry in with all my pension?”

Zena: So three pensions.

Nicole: So we’re at three. So there are three pensions.

Zena: Oh, wait.

Nicole: Side hustle income, CPP, OAS. And then, oh, and actually there was a sale of a house. Okay. So there was going to be—there was a lot of buckets and a lot of income potentials that we could pull from.

Zena: George. Tax. Hamster.

Nicole: Yes. So the big conversation that we had with her was, “Listen, we are trying to figure out from a tax perspective what to pull out when and from where to make sure that it’s tax-efficient, to make sure that we’re not, in an OAS standpoint, hitting thresholds.” So that’s the clawback. We want to make sure that she’s getting the benefits of the full amounts if we’re able to do it that way. And so without getting too far into her situation, it was very obvious to us that there was a lot of complexity and a lot of coordination that had to happen here. So we basically explained to her, “Listen, you’ve got a lot of buckets that you’re going to have to pull from, which is wonderful, but timing is going to matter and amounts are going to matter.”

Zena: And it’s not going to be the same every year.

Nicole: That’s right.

Zena: And so this is where one year—because that’s in the tax planning and looking at coordinating all that—okay, what about this year? What does this look like? Right. And then the next year you might be turning down that tap a little bit. Oh my God. I’m going to jump into—I’m going to share something that’s even a little bit more complex. Apologies to easy listening on a walk. This client didn’t know that we could do this. Depending if you’re young enough and you’re not 72 yet, right, and if you’re in your sixties, you don’t have to roll everything into where the taps turned on. You can leave some parking.

Nicole: Good point.

Zena: Parked, and stay and move only half over, because this is how we manipulate now the minimum amounts the government makes you take out based on the percent.

Nicole: That’s right.

Zena: If it’s not a retirement income fund yet and it’s still staying over as the pension.

Nicole: Yeah.

Zena: Or in a group RSP or a LIRA. That’s right. I’m getting—we’re talking a whole other language. I’m so sorry.

Nicole: And now we’re getting a little nerdy.

Zena: But you don’t have to move all the pension over.

Nicole: That’s right.

Zena: Into a “turning on the tap” bucket. Yeah, because now you don’t have to be at the mercy of the RIF minimum amount—exactly—that the government makes you take out. So sometimes we do half, and this client was saying, “You can do that? You can do that?” Oh yeah. For tax reasons, we’re not moving it.

Nicole: Of course.

Zena: We’re not going to turn on the tap on all of it. We’re going to turn on the tap on a bit. That’s right. Because you still have eight years till you have to.

Nicole: Absolutely.

Zena: And we’ve mapped it all out. Yeah. And so it’s also the timing of sequence of returns. Yes. So this is—I have my little—we have a retirement course.

Nicole: We do.

Zena: In our education pieces, I’ve got things that I can show you. But sequence of returns means that you’ve got—I’m going to give you an example. You have two people with the exact same amount of money. They each have, let’s just say they each have a million dollars. They each have an overall over 30 years return of, I’m going to be conservative and say 4% rate of return averaging over that 30 years. One turns on the tap during a downturn or in the first early years, there’s a market draw—kind of like a bear market. So we could say if there’s a minus 15% or minus 10% and now they’re turning on the tap. The other one, let’s just say when they turned on the tap, it wasn’t in a downturn and they didn’t have any downturns for seven or eight years until they turned on the tap. The market performance of when they actually sold money to pay themselves shows that one actually runs out of money by the 26th year. The other one has money left over after 30 years. And so this is the timing, and this is the defense strategy of what is inside that pension bucket. So do you have a defense strategy for when you turn on the tap and pay yourself? Is it a downturn in the market, and have you laddered in where maybe you turn off the tap from that one and I’m going to turn on the tap from maybe my cash reserves? Yeah. And that’s going to save you from it lasting a lifetime or not. And so these are all the things behind the scenes that we look at and structure. If you let a pension sit somewhere—

Nicole: Right.

Zena: And you’re just not going to be mindful of that, and you’re just going to turn on the tap.

Nicole: Right.

Zena: And now you’re putting yourself at risk for that—we call it the deaccumulation or sequence of returns. Right. If you’re not going to actually structure it, and because you are in charge of your own pension by leaving it there.

Nicole: Yep.

Zena: You don’t have an advisor or somebody overlooking all of it. It’s just you managing it.

Nicole: Yeah. And your whole picture. That’s important to say too. The pension—because we do know some pensions now have advisors.

Zena: Yes. I have seen some.

Nicole: So this is—but that’s okay. Right. But to Zena’s point here, they see the pension, they don’t see anything else.

Zena: They sit down for an hour.

Nicole: That’s right.

Zena: And I’m not sure if they have all your tax return files from the last 10 years and looked at your notice of assessment and, you know, how much do you have over here and doing that whole big picture? Yes. So it changes every year.

Nicole: Yes.

Zena: And we get in front of it twice a year. We meet and we say, “Okay, it’s pre-tax time. Yep. How did this look? Okay, let’s set us up for the rest of the year.” And we’re actually changing the amount and what buckets we take from in those pensions. And so I know there’s a bias here, Nicole. Let’s talk about that a little bit for sure.

Nicole: Yep.

Zena: Because my bias is as a control freak and someone that likes to manage and has all the knowledge of turning on and off when we need to. Yep. And tax planning is that we want to be able to just call you, bring you in and say, “Okay, here’s what we need to do.”

Nicole: Right.

Zena: And I think that’s why all-encompassing is why we like to manage it. Yeah. However, we sometimes tell you, “Nope, for sure. You’re good where it is.”

Nicole: Yeah. And that’s the thing, right? It’s, you know, the client’s best interest is always at the forefront of our decision. So it’s, you know, even if we are control freaks, which we are, and we do like to manage, and we like to have everything organized and we want to know—

Zena: We want to get in front of it.

Nicole: The picture, right? We want to make sure that we’re tackling everything before it even happens for you, but, right, if there is a situation where it truly doesn’t make sense, we tell you.

Zena: Yeah. And I think it’s about filling the toolbox so that when you—so if you’re listening and you need to meet with your advisor, right, and this is coming up and it’s about, “Okay, well are we planning on moving my pension over or not?” Yeah. I think it just has to be clear, valid reasons and show proof in the pudding. And usually that is, “Okay, here’s our plan that we’ve mapped out.” Yeah. And here’s our defense strategy that we mapped out. And if it’s pretty simple, it can stay where it is.

Nicole: Right.

Zena: And if there’s coordination or complexity involved.

Nicole: Yeah. I’m like, we like those words today.

Zena: I do.

Nicole: You know, and actually it’s funny, Zena and I were talking and we like analogies, I guess. Yeah. But analogies do help. And I think this one was really good. It’s a contractor analogy where it says, you know, it’s like your pension can be in a good spot and doing what it’s supposed to do. The same way an electrician does the electrical and the plumber does the plumbing. Right? They are the experts in what they’re doing, but the shift that happens in retirement isn’t really about—it’s not about replacing good people per se. Yeah. It’s about realizing that there are now a lot of moving pieces and a lot of moving parts, and someone needs to be coordinating how they all work together. So at that stage it becomes less about who’s holding each piece and more about who’s acting as this general contractor of the entire plan.

Zena: The project manager, you said.

Nicole: The project manager. Yeah. Yeah. So yeah.

Zena: Coordinating the decisions. Right. And I do know that—so using examples because that’s sometimes helpful to know that if you hear this, you’re not the only one. We had someone that did a great job managing their own, and they had their own defined contribution pension and had all these buckets and managing it super, super well. Coming up into the retirement planning the last, however many—six months, one year—the overwhelm, the burden, and you can see it, the emotional, the relationship between the two, the exhaustion and the stress of carrying that burden. The one partner managing it all and having to make the decisions and has been nailing it.

Nicole: Right.

Zena: Right. Using good information, asking all the right questions. Yep. Has done really well. But let’s talk about the emotional aspect of being in charge of coordinating all that and the overwhelm that can happen. And that’s when we talked about you could already be retired and still have these conversations and need to look at it. And it’s because maybe after a little while in this circumstance, it does feel like a lot and it’s, “You know, I’m ready to pay an advisor for the concierge fee to take care of it and manage it and keep all the files and do the tax filing, whatever it is.”

Nicole: Yeah. The mental load of it.

Zena: Yes. Yeah, the emotional piece.

Nicole: Totally. It’s important. And that’s something that you and I get to see when we’re in these client meetings. And like you said, some people nail it. They’re doing very, very well, but it is—it’s an emotional—it can be stressful, it can be—

Zena: How many coming back.

Nicole: Oh my gosh.

Zena: How many have come back? Yes. And we’ve said, “Think about this because you’re doing okay, you’ve got it set up with these buckets and you’re on automation. And for the next couple of years I think this is okay, and you can call me, we can review your tax situation a bit, but I think you’re okay.”

Nicole: Right.

Zena: The call back later, two to four weeks is, “Yeah. Can we be a client in this space?”

Nicole: Right. I don’t know. You’re like, “Okay.” But it’s because it’s—yeah. I think once everything is laid out, you just start to realize just how many moving pieces there really are. And again, you know, we’ve already touched on it in this conversation—this isn’t by any means to create panic or scare. Nope. This is just meant to say, you know, there is some complexity here, and it’s nice having someone in your corner who oversees the plan, who can just help coordinate these decisions for you, I guess at the very simplest turn.

Zena: Yeah.

Nicole: Yeah.

Zena: Even down as simple as not worrying about getting all the tax slips from all the different pensions and making sure you haven’t missed something in the mail or your online access.

Nicole: Yeah. And have someone to call.

Zena: Right.

Nicole: When you get those notices like, “What is this and what am I supposed to do with this?”

Zena: Yeah.

Nicole: Yeah. So, you know, hopefully we’ve shed some light here. I think, you know, we just wanted to, again, we wanted to kind of say this conversation and this decision comes up a lot, and it’s an important one. So it’s important for us that you have the tools and the information behind why you would or wouldn’t make a decision.

Zena: Yeah. And why we suggest something. And if you’re—and of course we sit you down and talk about all these reasons why.

Nicole: Yep.

Zena: But if you’re out there, you also should be getting the reasons why to a yes or a no from your advisor.

Nicole: That’s right.

Zena: And have it mapped out for you so that you’re feeling confident that you made the right decision.

Nicole: Yeah.

Zena: Yeah, that’s it. That’s all we got today.

Nicole: Thank you so much for listening.