What are your options with your pension?

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Once you get through the emotional toll that being laid off can take, you begin to look at things like your severance package and pension plan and focus specifically on what you should do with them.  You have some options for the pension specifically and while your options might be specific to your personal situation there are some regulations and laws applicable that you should be aware of. In some circumstances, this decision can cost you a significant percentage of your assets, so you want to be aware of the options and regulations and the specifics as they apply to your plan and your situation.  Of course you can always contact me directly if you have any questions or would like some guidance! Below I will review the types of plans to be considered, as well as your options and in a more general sense the advantages and disadvantages in each scenario.   


The first distinction between plans is that some are defined contribution plans, some are defined benefit plans, and some companies actually have an element of both.  A defined benefit plan (sometimes called a DB plan) means that once you satisfy certain conditions of employment or membership of a pension plan, you are provided with a defined benefit.  If you receive a statement from the pension plan that tells you that upon your retirement you will receive a pension of $X.XX per month based on your current status at a certain date, you are probably in a DB plan.  With a defined benefit the investments are taken care of by the plan and they are promising to pay you a certain amount at a certain time.  In other words as the name implies the benefits are defined. 


Defined contribution plans (DC) are different because they make no promise for a certain amount of pension provided at a certain age. Instead they provide a set contribution to your account for you and generally give you some investment options to select from.  You are given control of that decision and the expectation is that you will invest this wisely and provide a retirement income for yourself with those funds. These are sometimes in the form of matching plans (where you contribute some funds and the employer contributes a matched percentage based on that). 

Regardless of what type of plan you have though, there are options as well as regulations that come into play if your employment ends for any reason.  Specifically what I want to address here are people either are laid-off or choose to leave earlier than their retirement date. I present these options for you below in no particular order, although I did number this list: 


I.  Leave the pension where it is.  In a lot of pension plans you have the option to just leave things as they are.  If you have 20 years to go until retirement you can leave the funds in the plan and when the prescribed date is reached you can begin to withdraw a pension based on the type of plan or amount of money that you have within the plan.   


Advantages:  This is straight-forward in most cases and you don't have to think about how to invest the funds or what your options are. You are likely already familiar with the plan and aren't making any changes, so there are no issues that way at all.  


Disadvantages: There can be a number of disadvantages depending on the exact plan.  One can be a complete lack of control over the investments, because the plan invests and manages the assets on your behalf for those remaining years.  Another disadvantage maybe be in the event of a death where the surviving spouse may not be entitled to the entire amount of the pension.  This is something that is plan dependent though, and you should check that before you make that decision if it's important to you.  Another significant disadvantage is that by leaving the funds in a plan until your retirement date, you might not be able to begin withdrawals sooner or later depending on your desires.  There are certainly instances where the plan stipulates when and how much you will be paid; with your own account though you have much more flexibility in these two variables.  Lastly, in some cases you are offered a deferred pension at a set value today, whereas you can invest the funds and potentially increase the monthly amount over those remaining years in your own investment account. 


II.  Transfer the funds to your new employer pension account.  This option doesn't always exist, but certainly there are times when you can move your pension from your prior employer to the new one.  To be honest this isn't something that I see regularly, although it does happen.  The most common reason that someone would do this is likely to have their pension funds all in one account.  I would suggest that the overall lack of flexibility that this offers you makes this option less palateable (if you are transferring the funds in the first place, what are you gaining by moving them to another pension only to be governed by the same regulations and restrictions in terms of investment options?)  That said, there are surely some who take that track.


III.  Transfer the funds to your own Locked-In Account.  Here you would take the commuted value, or the market value, of your pension plan and move the funds to your own locked-in account.  The trade-off here can amount o trading some certainty in terms of the amount of a pension that you will receive on a set date and such for the flexibility of making those decisions on your own. 


Advantages:  As indicated above the major advantage here is the flexibility that this option affords.  You can select (within the confines of the legislation) when to begin taking your pension and can select how much you would like to receive each month/year (within a range specified by law).  You can also have the option to invest in a much broader universe of investments than what are traditionally offered under most plans.  Lastly you have the option here to name a beneficiary and that can be a significant departure from the benefit they would receive if you were to pass away as a member of the plan. 


Disadvantages:  The potential disadvantage here is that you don't have the same certainty of the current plan.  While they are guaranteeing you a set pension to begin on a set-date, you don't have the same guarantee under your own plan.  I should note that there are many options here and there are certainly ways that you can receive these guarantees and that certainty in your own investment accounts, so this potential disadvantage can be mitigated, but it’s a potential consideration depending on what you select. 


Overall, there are a lot of factors to consider and a lot to take into account.  Unfortunately there is no hard and fast way to do this and nothing where we can have full certainty without a fuller examination of your situation and your wants and needs.  While the flexibility and increased benefits might be of importance to some, others will prefer to have the surety of a set pension amount.  The best thing to do is contact a financial advisor who can provide you with a breakdown of what your alternatives are, how the calculations of each option look for you and make a decision based on those facts and your own comfort.