Leaving your Employer - What To Do with Your Defined Contribution Pension or Group RRSP

Leaving an employer marks a significant milestone in your career journey. There can be many reasons for doing so. Sometimes a work change happens when you are ready to retire, but often this change occurs mid-career with a change in role or desires.

Beyond the excitement of new opportunities, it's crucial to consider the options with your pension or workplace savings plan. In Canada, navigating your pension options requires careful consideration and understanding of the available choices. This blog post will guide you through the options you have with your defined contribution pension plan or group registered retirement savings plan when you leave your employer.

In a previous post, I discussed what the various types of pensions are. You can check that post out here.

Letter from your Plan Administrator

First things first, when you leave your employer you can expect to receive a letter that outlines your options with your plan. It might be called a statement of options, or settlement option form, or something else, but this is the key document to look for, as this will include the exact options that are available to you.

Note that the deadline to respond to this letter is usually about 3 months without otherwise being placed in the default option.

Leaving a Defined Contribution (DC) Pension Plan

In a DC plan, the eventual retirement benefit is determined by contributions and investment performance. If you leave the plan, either voluntarily or involuntarily, here are the typical options:

1. Leave your pension within your employer’s plan: This is often the default option. You may choose to leave your assets in the employer’s plan, often transferred to a separate account. Compared to when you were employed by the employer, additional fees may apply.
2. Transfer the assets to a different plan: You should have the option to transfer your assets to a LIRA or income fund as a lump-sum amount. A LIRA is a Locked-In Retirement Account for assets originating under pension legislation. You may also transfer to an income fund (LIF, PRIF) where you may start taking income from the portfolio. Certain rules and restrictions apply and both plan types will be impacted by the jurisdiction of your pension. There is no tax to transfer from the pension to a LIRA or income fund. LIRAs and associated income funds can be invested like an RRSP (stocks, bonds, mutual funds, ETFs). The LIRA and income funds are a whole other topic with full details to follow in another post.You will likely have two options for where to transfer your funds under this option: 1. Leave them with the pension provider. This is easiest to illustrate with an example. Let’s say your pension provider was SunLife. You may have the option to leave your assets with SunLife and transfer to another account type still with them. 2. Transfer to another financial institution. You may transfer your plan to another institution. This would typically be to transfer to a self-directed account or to consolidate with an advisor that you work with.
3. Purchase an annuity: You may be eligible to purchase an annuity with your pension funds to set up an income stream for life or a specified period. This can provide financial security and predictable income in retirement, but it may not offer the same level of control or potential for growth as other options.

Leaving a Group Registered Retirement Savings Plan (RRSP)

A group RRSP is like a regular RRSP just within a group, or employer, setting. Here are the likely options when leaving a group RRSP:

1. Leave assets with current provider: Just like the options above with leaving a DC, you may choose to leave it with the current provider. This would allow you to transfer to a RRSP or RRIF (Registered Retirement Income Fund) under a different plan.
2. Transfer to another institution (RRSP or RRIF): Again, like the options above, you may transfer your assets to another financial institution. This can either be self-directed or with an advisor and you will have the option to transfer to an RRSP or RRIF.
3. Withdraw in cash: Lastly, with a group RRSP you may take the funds in cash. Note that this would be fully taxable to you like regular income.

Factors to consider:

I think there are a few key factors to consider when trying to decide what to do:

1. Investment Strategy: Which option aligns best with the investment strategy and philosophy that you have implemented? Do all the options for transferring your plan provide the same investment choices? Fees?
2. Financial advice: Do you currently work with an advisor? If so, consider how this plan might impact their planning and investment recommendations. Make sure the advisor knows about this plan so it can be incorporated into your financial plan. By leaving the assets in the plan with the current provider, there might not be much opportunity for advice, certainly not specific to you. If you have a trusted advisor relationship, perhaps they could provide better advice for you on these funds.
3. Control: To what level do you want to have control over your investments? Consider the various options and which ones might suit you the best.

So in conclusion, be on the lookout for that letter from your plan administrator for your specific options. Know that leaving your employer doesn't mean leaving your pension behind.

Whether you choose to leave your pension with your former employer, transfer to a self-directed account or with another advisor, or purchase an annuity, the decision should align with your financial goals and risk tolerance.

Personally, I believe in consolidating your plans which would mean transferring your group plan to a self-directed account or to where your other assets are managed with an advisor. The benefits I see are a properly designed portfolio considering all your assets, simpler communication and coordination, and better advice based on a coherent and sound strategy.

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