How to make the most of a pension transfer

Q: I recently changed jobs and got a letter from the pension plan of my previous employer. The letter gave me several options regarding the pension amounts that I had accumulated.

One option was to do a non-locked in transfer of the pension amount to my personal RRSP. The transfer would be done directly from the pension to my brokerage account.

Before taking this option, I wanted to confirm that this would not cause any tax or RRSP over contribution issues for me. Currently I have no RRSP contribution room, however I understand that this type of transfer, directly from the pension to my RRSP would not count towards my contribution limit?

—Ray

A: Whether you are changing jobs or retiring, when you leave a pension plan, you have a decision to make. The pile of paperwork that comes in the mail tends to be a bit intimidating and depending upon whether or not you were in a defined benefit (DB) pension or a defined contribution (DC) pension, you might have a few choices to make.

With a DB pension, you may have an option to begin receiving your monthly pension payments if you are over the age of 55. If you are younger, you may be able to take a lump-sum payment in lieu of future monthly pension payments and deposit that lump-sum into your RRSP.

Today’s low interest rates cause the calculation of that DB lump-sum to be artificially high, making it a really compelling opportunity to consider a lump-sum payout. Some, but possibly not all of the payout may be able to go tax-free into an RRSP account. Part of the payment may then be taxable to you based on government formulas. This should be clearly laid out in your pension documents, Ray, so assuming there is no reference to a taxable payment, you should be ok.

With a DC pension, you have the same opportunity to move the money out of the plan and into an RRSP. In effect, you are moving your investments from a mutual fund account with the pension plan into an RRSP of your choosing where you may be able to buy other investments beyond mutual funds. The transfer from a DC pension to an RRSP is tax-free regardless of how much is being transferred. This is true despite your RRSP room or any other factors, so you do not have to worry about overcontributing to your RRSP.

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If you have the option to transfer your pension into a non-locked in RRSP, it may be that your retirement plan is actually a group RRSP and not a pension plan. Or you may have a small balance below certain limits that does not need to go into a locked-in account.

It is important to remember that tax-advantaged accounts like TFSAs, RESPs, RRSPs, LIRAs, DPSPs, DC pensions and so on can generally be transferred from one financial institution to another and maintain their tax-free or tax-deferred status in the process. I often encounter people who think they are wedded to their investment company or adviser for life, otherwise they will pay tax on moving their money from A to B. Transfer forms, not unlike the ones you received from your pension plan, can allow you to move money on a tax-free or tax-deferred basis from one place to another, regardless of TFSA, RESP or RRSP room.

In summary, Ray, your RRSP room should not be a consideration as you move your pension plan money into an RRSP, unless you are leaving a DB pension and a portion of the lump-sum payment is taxable. If it is a DC pension or a group RRSP, you definitely have nothing to worry about.

It is important to remember, however, that the pension options you had in a DC pension plan were likely more vetted and low-cost than the options you may have in your RRSP. So be prudent how you invest the money and use this as an opportunity to re-evaluate your overall investments.

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Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto, Ontario. He does not sell any financial products whatsoever.

About Jason Heath, CFP

Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto. He does not sell any financial products whatsoever.