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Q: I am 61 years old, contemplating early retirement. My spouse is 10 years younger, and she will work another five years. My defined benefit pension calculator shows the value of my plan at approximately $1.3-million. This pension is not indexed to inflation and the survivor benefits are less than generous. Should I commute the value of the pension yield of $900,000 to a LIRA (Locked-In Retirement Account), and will the balance have to be paid out as taxable income? As I terminate work, I also stand to receive a cash bonus of $150,000; vacation/sick time will add up to another $60,000. I still have RRSP contribution room of $100,000 and my spouse has $60,000. What are my options?
We asked Jennifer Watson, CFP®, managing partner at Watson Investments and portfolio manager at Watson Securities of Aligned Capital Partners Inc., to answer this one.
When deciding to keep a defined benefit (DB) pension where you have a set amount of money coming to you annually, or commute it and find someone to properly invest the proceeds to create an income from the money, the right choice depends on a few key factors, Ms. Watson said.
She advised following these steps: First, evaluate the guaranteed annual pension income, your health and life expectancy and the survivor benefit. “If you are not expecting to live a long time, you may want to convert,” she added. “If you are healthy, it’s not as easy of a decision. Given your spouse is 10 years younger, consider the potentially long duration she would receive the survivor’s benefit on the DB pension.”
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Next, you should then compare what income you could generate from the $900,000 LIRA plus approximately $200,000 – the after-tax investment amount (assuming your province’s tax rate), and how that compares with your annual DB payment.
A note on LIRAs: According to Ms. Watson, if you did decide to convert the DB pension into a LIRA, there are restrictions over minimum and maximum withdrawals before the age of 55 (assuming your wife is 51), and it must be converted to a Life Income Fund annuity (LIF) by the time you turn 71. As you are 61, you could unlock a portion based on your maximum pensionable earnings, and Ms. Watson recommended that if you choose this route, you move the unlocked portion into a RRSP or a RRIF to give you more flexibility over withdrawals.
As for your spouse, they can be listed as the beneficiary on the LIRA, as well as the RRSP or RRIF. More specifically, “Listing your spouse as the successor annuitant of your LIRA will allow for a tax-free roll over to her upon your passing,” Ms. Watson noted. Any amount remaining on her passing – assuming you die first – would go to her heirs, whereas any amount in the DB pension would not go to heirs after your wife dies. “If you take this option, you will need to make sure your money is managed well for your income and growth needs. Investing and tax withdrawal strategy is very important as it will drastically impact your income and the amount you leave to your wife, and then her heirs.”
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Regarding the other lump sums you will receive when you retire, Ms. Watson recommended maximizing your RRSP contribution room, perhaps through a spousal RRSP if your wife has less pension and RRSP money in her name. “This creates flexibility for tax planning and keeps the tax benefit to you, which is more valuable because you are in a higher income bracket,” she said. You can then also maximize your wife’s RRSP contribution room in her own RRSP.
Once that’s maxed, think about investing the balance of the lump sums and the tax refund you receive from the RRSP contributions in a TFSA. “You can hold long-term, high-expected returning investments in the TFSA,” Ms. Watson said. Ensure you list your spouse as the TFSA’s successor holder, and consider contingent beneficiaries for all the accounts.
Given the complexity and value of your situation, this is worth consulting with a financial planner before your decision deadline.
Do you want advice on a financial planning or retirement issue that’s affecting you? Send us an e-mail.
