On Termination and Pension Benefits

June 22, 2012

Losing a job is a tough thing. In this day and age and with the state of the economy, it also seems far too common. If you’ve recently been given the pink slip, here are a few quick tips to ensure you protect your pension benefits.

The first thing you’ll notice is that your pension is registered either provincially or federally. This is important because each jurisdiction has different pension rules. What follows is a brief overview of things to be aware of when you’re taking that first step of investigating your options. It is not specific to any particular jurisdiction.

That Lump Sum Option
The gut reaction when you know your next paycheck may be a ways off is to look for ways to get cash now. But that may be to the detriment of future benefits. Pension plans try to protect you from being your own worst enemy by disallowing you to take this option if your pension exceeds a certain amount. Usually, a cash payment may be taken only if you’ve been with the company for a few years, and don’t have a lot of pension benefits accumulated.

Taxation for the Year
If you’re terminated near the end of the year and get a lump sum severance, it may bump you into a higher tax bracket. This is because it’s taxable and added to the income that you’ve already earned from working for the better part of the year. If you are terminated earlier in the year and receive a lump sum severance, from a tax perspective the transition between jobs may work in your favor.

Employment Insurance
When someone loses a job by no fault of their own EI can provide a temporary income benefit while you are looking for work.

If you’re near retirement age, think twice about triggering a pension plan early. Depending on the type of payout you choose, the pension could reduce the amount of EI benefit that you’re eligible to receive. It may be a better idea to defer taking your pension until after EI benefits have been paid.

The Importance for Your Beneficiaries
Your pension represents a significant benefit – not only for yourself, but also for your spouse or common law partner, and in some cases, for other beneficiaries. When you’re reviewing your pension options, take the time to think about how the payout from the new contract will affect your beneficiaries. Will payments continue to them after your death? Will the amount of pension be reduced on first death, and if so, by how much?

Future Value & Indexing
The popular saying ‘a dollar today is worth more than a dollar tomorrow’ is not necessarily true in the pension world. Your pension contract may have valuable features that make those future dollars worth more than they would be outside of your pension plan. One of these would be indexing. Indexing means that your payments could increase with the cost of living. As prices for food, housing and transportation go up, it can be valuable to have a pension that will keep up.

So as you can see, there are a lot of things to consider before you make a decision about which pension option would be best for both you and your family. It is always good to get qualified advice. If you need to speak to someone about your own situation, we can help.

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