As a business, you probably already offer a pension plan to your employees. If you don’t, you should act now to comply with the law. The first concern of employees is usually making sure they accumulate the right amount to meet their retirement needs.
But when they are about to reach retirement, many employees also wonder what options they have with their accumulated money. Different possibilities exist, but some are much more attractive than others. Read this article to learn more on your retirement savings options!
Retirement savings: Keeping assets within the pension plan
Upon retirement, employees are usually much better off keeping their assets within their employer’s pension plan. Why? By maintaining their assets within such an environment, employees will benefit from the very low management fees offered to group plans.
The time when employees will need their money can vary widely, depending on their retirement plans and their assets. Some financial vehicles are designed to provide retirement income immediately or at a later date.
No immediate need for the retirement money
A retiring employee who doesn’t need to withdraw money immediately can simply elect to transfer his/her retirement savings to a registered retirement savings plan (RRSP) set up for the company’s former employees.
The money and the return generated will thus remain tax-sheltered until the time when the employee is ready to make withdrawals. If the retirement savings originate from a simplified pension plan (SPP) or a defined contribution pension plan (DCPP), the money will be locked-in. The employee must then transfer his/her assets to a locked-in retirement account (LIRA). This is simply a special type of RRSP designed to hold locked-in money.
When employees want to keep on working, but with another firm, they can ask their new employer if it is possible to transfer their retirement savings to the new employer’s plan. They will be able to postpone the selection of a disbursement option for their retirement savings while taking advantage of lower management fees.
Immediate need for the retirement money
A retiring employee who needs to withdraw money immediately can simply elect to transfer his/her retirement savings to a registered retirement income fund (RRIF) set up for the company’s former employees.
An RRIF is an extension of an RRSP: it is used to withdraw RRSP funds in a predetermined manner. It is important to remember that an RRSP/LIRA must be transferrred to an RRIF/LIF by December 31st of the year when the person turns 71. The money and the return generated will thus remain tax-sheltered, but all withdrawals are taxable. A minimum amount equal to a percentage of the total value of retirement savings must be withdrawn annually, according to the rules established by the government.
If the retirement savings originate from a simplified pension plan (SPP) or a defined contribution pension plan (DCPP), the money will be locked-in. The employee must then transfer his/her assets to a LIF (life income fund). This is simply a special type of RRIF designed to hold locked-in money. Unlike the RRIF, a maximum withdrawal amount applies each year, based on the age of the employee.
Transferring assets outside the plan
Employees can also elect to transfer their assets outside their former employer’s plan. They can use different financial vehicles: RRSP, RRIF, purchasing an annuity, or a cash withdrawal. By doing so, they often face higher management fees that can affect their potential returns.
As you can see, your employees have a range of retirement savings disbursement options to choose from. Information sessions organized by your broker can help them better prepare for retirement.
For more details, please do not hesitate to contact our experts today.
Jimmy brings overs 20 years of experience in pension plans. After starting his pension career at the Ontario Teachers’ Pension Plan, he worked as DC Consultant for a large actuarial firm and two insurance companies before joining AGA. With his extensive pension experience, he has developed an acute expertise in the selection, the design and the implementation of pension plans. Jimmy provides his clients with both expertise and insight on their employee benefits.