Can I withdraw my pension early?

I am wondering what the process is to gain access to my pension. I am currently on hold with Pension Canada and thinking I should hang up, as I am not sure what to say. I am concerned that they can refuse my request based on what I say. Do they reserve the right to deny me my pension if they do not like my reasons for withdrawing it so early? Or is it none of their business? It is not for medical reasons, only financial/personal ones. 

I also heard the pension needs to go through a third party, like RRSPs with my bank, before it can be released to me and that it is a good idea to initiate this process two to three months ahead of when I want the lump sum, as that is the approximate processing time. I do not currently have RRSPs, but I can acquire some or will do whatever I need to, or what is recommended, to gain access to my pension. 

Thank you in advance for any advice you can provide! 

—Catherine 

Withdrawing your pension early in Canada

Teachers are absolute unicorns. As a mom of four children, I want to say with all my heart: Thank you! 

Before we jump in, let’s go over how pensions work in Canada. There are limitations on withdrawing from a pension. Regardless of what you intend to do with the funds, the main factor is age—the funds are not accessible until you turn 55.

Each province and territory has its own teachers pension plan, so before taking any other steps, you’ll have to gather information from all your individual plans from Alberta, Nova Scotia and Nunavut. 

Defined benefit vs. defined contribution: The difference between pension plans 

There are two types of pension plans in Canada:

1. Defined benefit (DB) pension plans
2. Defined contribution (DC) pension plans

Their names seem to have much in common, but they are very different. 

A DB plan considers your “years of service” (meaning the number of years you’ve worked) and your income history to provide you with your pension income. This calculated pension amount will be consistently paid to you starting at a specific age until death. 

In comparison, a DC plan establishes the amount of money both you and your employer have put into the plan during your working years and provides you with a balance. In retirement, you’ll draw your income from that balance. The amount of income withdrawn from your plan will depend on how much was contributed, for how long, what the market conditions are, and how well the plan is managed.

Because you’ve been a part of a teachers plan, you are likely looking at a defined benefit plan; however, it is important for you to check your documents or reach out to each of your plan providers to confirm.

Is there a penalty for withdrawing your pension early? 

There is no real “penalty” for accessing your pension early. But the sooner you access the funds, the less you will receive. 

With a DB plan, your retirement income is based on an equation that includes years of service as well as average income. In situations where both those variables go up with time, withdrawing early means you will be locking in a lower income amount.

With a DC plan, the earlier you withdraw the funds, the less time the investments have to grow, and once you have accessed the plan, you can no longer contribute to it. So you will either have a smaller annual retirement income, or it will not last as long. 

The fine print and pension-specific limitations

Pensions are a unique savings vehicle, and there are rules and regulations around accessing them. When you leave an organization (either for another opportunity or for retirement) you will have to make decisions in regards to the pension plan you have there. The pension option package is typically sent to you after 30 days of your departure. Usually your options are:

1. Leave the funds where they are 
2. Transfer to a locked in retirement account (LIRA)
3. Transfer to another pension plan

Unfortunately, none of these options puts money in your hands. If you transfer the balance of your plan (called your “commuted value”) to an account at your bank, the funds are transferred to a LIRA. Unlike with a registered retirement savings plan (RRSP), which you can access at any age, you can’t access a LIRA until you are 55 years old or older. Since you are only 43, you would not be able to access those funds for several more years. 

There are some exceptions; however, regulations fall under the financial services commissions of each province or territory in which the pensions are held.

Next steps

It can be difficult to navigate your options and understand how various accounts work. You are taking a great first step by speaking to someone who can provide insight and support. Talking to a pension specialist or Certified Financial Planner might be a great next step so that you have someone to go over your options and potential plans to achieve your goals.

Happy pension planning!

This column was written by Meghan Chomut, CFP, with Porte Rouge.

Qualified Advice is written by members of FPAC (the Financial Planning Association of Canada), a MoneySense content partner. Working closely with governments, regulators, financial planners, academia, vendors and the general public, FPAC’s goal is to set standards and principles that will allow financial planning to evolve into a knowledge-based profession that ultimately commands the credibility, public awareness and respect afforded to other advisory professions.

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