Deciding whether to transfer your pension plan is an important financial decision that requires careful consideration of the pros and cons. This guide provides a detailed overview of pension transfers in Canada, including how they work, eligibility rules, the transfer process, and key factors to weigh when deciding if transferring your pension is the right move.
How Pension Transfers Work in Canada
A pension transfer involves moving the accumulated value of your pension from your former employer’s pension plan to another retirement savings vehicle like an RRSP, LIRA, or a new employer’s pension plan. The amount transferred is the commuted value or termination value of your pension entitlement earned to date. This lump sum includes your contributions, your employer’s contributions, and any investment gains.
When you transfer out of a pension plan, you are essentially cashing out your entitlements from that plan. You give up future accrual of benefits in that plan going forward in exchange for the lump sum value. The receiving plan or account then becomes the vehicle where you can continue saving for retirement.
When Pension Transfers Are Allowed
You cannot always transfer your pension plan. Transfer rights are governed by pension legislation.
Leaving a Job
For most pension plans in Canada, you have the option to transfer the commuted value if you voluntarily leave your job and terminate your plan membership. This includes quitting, retiring, or taking a new job.
You can transfer your pension if your employer terminates the plan. This usually occurs if the company goes out of business, restructures, or decides to switch plans.
Pension assets are considered family property in divorce and separation. The commuted value can be divided and transferred to the spouses’ separate accounts or plans.
Shortened Life Expectancy
If you have a terminal illness or disability resulting in shortened life expectancy, you may unlock pension funds by transferring to an RRSP or annuity. You must provide medical evidence.
When you become a non-resident of Canada, you may have the option to transfer and cash out your pension. Time limits apply, such as within 5 years of leaving.
Small Benefit Rule
If your pension entitlements are below a certain threshold (e.g. $10,000), the plan administrator may force you to transfer out the commuted value as a lump sum.
Pension Transfer Eligibility
Eligibility to transfer your pension plan depends on your age and the type of pension plan:
- Defined benefit pension – Transfer rights may be restricted. Transfers are often not allowed if you are within 10 years of the plan’s normal retirement age.
- Defined contribution pension – Full transfer rights are typically available, regardless of age.
- Hybrid pension – Each component has different rules. The defined benefit portion usually has age restrictions.
Check with your plan administrator to confirm your transfer options. Eligibility can also depend on other factors like ongoing employment and marital status.
How to Transfer a Pension Plan in Canada
If you are eligible, here are the typical steps to transfer your pension:
- Request transfer options – Contact your pension administrator for transfer forms and details.
- Choose receiving plan – Decide where you want funds transferred – RRSP, LIRA, new pension plan, etc. Consider account setup if needed.
- Complete paperwork – Forms to initiate transfer and set up receiving plan. May require spouse’s consent.
- Administrator reviews request – Plan administrator verifies eligibility and calculates transfer value.
- Administrator issues transfer – Funds moved directly to receiving plan/account once approved.
- Confirm transfer receipt – Follow up to ensure funds deposited as expected into new account.
- File tax forms if applicable – Report RRSP transfers and taxable pension amounts.
The transfer process can take 4-8 weeks. Pension administrators charge fees, often $100-$300, so confirm costs.
Where to Transfer Your Pension
You can transfer pension funds to these common registered accounts:
- RRSP – For private sector DC and DB plans if you have RRSP room. Flexible investments. Withdrawals taxed.
- LIRA/LRSP – For private plans if no RRSP room. Locked-in. Must convert to annuity or LIF/LRIF for withdrawals later.
- Annuity – Guaranateed lifetime income. Little flexibility.
- LIF/LRIF – Unlocks LIRA savings once eligible. Flexible payments. Must deplete by end of age.
- New employer pension plan – May accept transfers. Adds to future pension. Restricted access.
Evaluate options like risk, taxes, fees, flexibility in withdrawals, and your retirement goals. An advisor can help decide the optimal destination.
Key Factors in Deciding If You Should Transfer Your Pension
Determining if transferring your pension is the right move depends on weighing several important considerations:
1. Plan Type and Features
- Defined benefit pensions guarantee a predictable income level at retirement. This is hard to replicate.
- Defined contribution pensions depend on investment returns. Transfers may provide greater flexibility.
- Assess if the plan has indexing, survivors benefits, disability protection, etc.
2. Health and Life Expectancy
- Remaining life expectancy affects the total value you may receive.
- Those in poor health may benefit from transferring to an RRSP or annuity.
3. Investment Skill and Risk Tolerance
- Can you earn higher returns investing the lump sum yourself?
- How much risk are you comfortable accepting?
4. Account Fees and Expenses
- Compare fees charged by your pension plan to potential accounts.
- Transfers to RRSPs defer taxes. LIRAs have mandatory tax withholding.
- Withdrawals from RRSP/RRIF will be taxed.
6. Value of Plan Benefits
- Estimate the commuted pension value and projected future income stream.
- Factor in value of benefits you may lose.
7. Retirement Lifestyle Goals
- Assess flexibility and control over funds needed to achieve your goals.
- Will pension or transfer support your desired retirement lifestyle?
Consult a qualified financial planner to review your specific situation before deciding to transfer your pension.