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Transferring Pension Plans in Canada: A Detailed Guide

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.

Plan Termination

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.

Marriage Breakdown

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.

Non-Residency

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:

  1. Request transfer options – Contact your pension administrator for transfer forms and details.
  2. Choose receiving plan – Decide where you want funds transferred – RRSP, LIRA, new pension plan, etc. Consider account setup if needed.
  3. Complete paperwork – Forms to initiate transfer and set up receiving plan. May require spouse’s consent.
  4. Administrator reviews request – Plan administrator verifies eligibility and calculates transfer value.
  5. Administrator issues transfer – Funds moved directly to receiving plan/account once approved.
  6. Confirm transfer receipt – Follow up to ensure funds deposited as expected into new account.
  7. 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.

5. Taxes

  • 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.

Pension Transfer FAQ

Q1. Can I transfer my pension to multiple accounts?

You can usually split the commuted value of your pension between different receiving accounts, such as 50% to an RRSP and 50% to a LIRA. Some restrictions may apply if you want to transfer to more than one RRSP. Check with your pension administrator.

Q2. What fees apply to transfer my pension?

Pension plan administrators often charge a transfer fee in the range of $100 to $300 to process the commuted value calculations and transfer paperwork. The receiving institution may also charge account setup fees. Ask for fee details in advance.

Q3. Do I have to transfer my entire pension?

No, partial transfers are allowed in many cases. For example, you may be able to transfer just 50% or 75% of the commuted value. This allows you to keep accruing some pension benefits. Rules vary by plan, so discuss partial transfer options with your administrator.

Q4. Can I transfer my pension to a foreign plan?

Yes, you can generally transfer your Canadian pension to an eligible foreign pension plan, such as a 401(k) in the US. Make sure the foreign plan meets Canadian locked-in rules and all the necessary paperwork is completed. Tax implications also need consideration.

Q5. What are the risks of transferring my pension?

Key risks include: losing valuable benefits, being unable to replicate the income stream, investment losses, higher fees eroding savings, and lack of longevity protection. You also lose future benefit accruals. An advisor can help assess the tradeoffs.

Q6. How are my spouse's rights impacted if I transfer my pension?

Your spouse must provide written consent for the pension transfer to proceed. Spousal benefit entitlements are impacted. Options like allocating funds to a LIF or annuity with joint survivor benefits should be considered to maintain some protections.

Q7. What happens to my pension if I die before transferring?

If you pass away before initiating a pension transfer, survivor benefits will flow to your eligible beneficiaries as per the normal rules of your pension plan. The commuted value lump sum is no longer available.

Q8. Can I transfer my pension if I am still employed?

While still employed, transfer rights are usually more limited compared to after termination. Defined benefit pensions often prohibit transfers for active members. Some defined contribution plans may allow transfers.

Q9. Is there a deadline to transfer my pension after leaving my job?

Most pension plans do not impose a deadline, but transfer delays could impact the commuted value calculation. For non-residents, strict time limits like 60 or 90 days may apply to request a transfer. Check with your plan upon termination.

Q10. Are there tax consequences when I transfer my pension?

For transfers to an RRSP, there are no immediate tax impacts. With LIRAs, the administrator must withhold tax before transferring the funds. You can claim this tax withholding as a credit on your tax return. Transfers to foreign plans may have tax withholding requirements as well.

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