People who are about to retire must look at the pros and cons of every potential scenario, says Charmaine Huber, a certified money coach with Money Coaches Canada.J.P. MOCZULSKI
Retirement may seem like an abstract concept to many young couples, but for Tom and Sue Heideman, it was something they began planning early in their marriage. And now the two are loving their work-free lifestyle after recently moving from Toronto to retire in a small community near Orillia, Ont.
Ms. Heideman, 59, is a former recreation therapist; her husband, 56, spent the bulk of his career as a transit driver. They have a 21-year-old daughter, two golden retrievers and a passion for boating. They feel especially fortunate to have defined-benefit pensions, especially in an era when these products are becoming increasingly rare.
They say that choosing which pension option to take, however, was a process that required careful thought. Single life, joint and survivor, or lump sum: For couples, determining the best pension benefit is one of the most important financial decisions they'll ever make.
"We talked about retirement for years and years, practically through our whole marriage," Ms. Heideman says. "When I started [working] in my early 20s, you're not thinking about pensions, but at that time we had a choice to start with a pension right away or wait; I started right away. I was young, but we had the wherewithal to know that a pension was important."
Mr. Heideman has always enjoyed financial learning and, once he and his wife were nearing retirement, he carefully studied the numerous distribution-plan choices that the pair's pension plans offered. The two were able make informed decisions together about what fit best with their financial needs.
"When it came to joint and survivor benefits, it took a lot of soul-searching," he says. "Try to seek out as many opinions as you can; they are going to range in extreme, and it's up to you to narrow it down."
Neither Ms. nor Mr. Heideman was offered a single-life option, but this is commonly presented to pre-retirees. It is a larger amount of money per month, but when that person dies, the income stops. That could leave the surviving spouse in a difficult financial situation.
The two both have chosen to receive joint survivor benefits; her plan is at 66-2/3 per cent, and his is 60 per cent. This means that if Sue dies, Tom will receive 66-2/3 of her pension; if Tom dies, Sue will receive 60 per cent.
Tax implications were chief among their considerations. If Tom left 100 per cent to Sue, it would have bumped up her income-tax rate to a point where she would be receiving less monthly income due to a higher tax rate.
"Of course, on the surface, I wanted to leave 100 per cent [of my pension] for my wife, but you have to look a lot deeper into it," Mr. Heideman says. "There will be repercussions in the future in life."
A joint-survivor benefit that leaves 100 per cent of a pension to the surviving spouse starts with a smaller monthly payout at the outset. This option could work for couples where only one person has a pension and the other does not.
Another option that some pre-retirees have to examine is a lump-sum distribution versus taking the pension as an annuity paid out monthy.
As the Heidemans did, people who are about to retire must look at the pros and cons of every potential scenario before deciding on which pension option to take, says Charmaine Huber, a certified money coach with Money Coaches Canada who works in the Simcoe County-York and Greater Toronto regions.
It's a complicated exercise, sometimes involving actuarial calculators to figure out what makes most sense.
"There are so many factors that come into play, including CPP [Canada Pension Plan] and OAS [Old Age Security]," Ms. Huber says. "It really comes down to: Do you need that money right now? Do you have enough income to sustain yourself without it? If we all knew what day we were going to die, it would be a slam dunk; it would be simple."
Since we don't have a crystal ball, people need to take into account other considerations, aside from tax implications, such as life expectancy based on family history and current health conditions. "You can only make the best decision based on the information you have at the time," Ms. Huber says.
Sandi Martin, partner and financial planner at Spring Financial Planning in Gravenhurst, Ont., agrees that the single-life option isn't typically a great one unless people have a fully funded retirement and the pension is "extra."
A lump-sum payment has its own pros and cons: There's the tax hit people will take when they receive it; the payout amount is likely to be six figures and would be considered taxable income. In other words, say goodbye to as much as 50 per cent of it.
On the other hand, single-life or joint-life pensions don't have an estate value. (The exception is if someone dies within a guarantee period; the beneficiary would receive what's left of the pension benefit for that remaining timeframe.) "If I have high hopes of passing it on to my children when I'm alive or after I pass away, a lump sum is really the only way to do that," Ms. Martin says.
The co-ordination of other benefits is an additional cornerstone in the decision-making process. You never want to look at pension options in isolation but rather within the broader context of what your partner has available and your overall financial plan.
Then there is the stability of the pension itself. This may not be information most people can attain easily or specifically, but Ms. Martin notes that it's worth looking at where your pension payments will be coming from. If you work for a small company or in a troubled sector, it may be worth pausing before accepting the monthly payments.
"Do you have a big federal pension or a provincial or municipal pension, or is it a small company where the pension maybe has not been funded properly all these years?" she says.
"If you're concerned about the state of your industry, and you've invested all of your pension within it and you're hoping for a 30-, 40-, or 50-year retirement, all the beauty of a lifetime guaranteed pension amount that gets deposited every month certainly fades if that company has to claim bankruptcy or has to restructure or drastically change its benefits to be healthy."
Sample pension benefit distribution choices
Retiree example: A 62-year-old woman with 16 years of service. Here are three of many options she could choose from:
- Single-life pension, no guarantee: $1,911 per month: Payments will end on the first day of the month in which she dies.
- 60 per cent joint and survivor pension, no guarantee: $1,807 per month: When she dies, her qualifying spouse, if still surviving, would receive 60 per cent of the monthly pension that she was receiving before her death, for her spouse’s lifetime. If her qualifying spouse does not survive her, the monthly pension payment would end on the first day of the month in which she dies.
- 100 per cent joint and survivor pension, no guarantee: $1,744 per month: When she dies, her qualifying spouse, if still surviving, would receive 100 per cent of the monthly pension she was receiving before her death, for her spouse’s lifetime. If her qualifying spouse does not survive her, the monthly pension payment would end on the first day of the month in which she dies.
Source: Morneau Shepell Ltd. based on the information provided by The Globe and Mail
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