Removing Your Funds from the Plan
Removing your termination benefit can be a difficult decision to make, but we're here to guide you through it. For personalized advice tailored to your situation, please speak to a financial advisor.
Considerations When Removing Your Funds from the Plan
Have you resigned or has your contract been terminated and are you considering taking your funds from the plans? To make that decision, there are a number of important factors you will want to consider.
If your contract has been terminated and you’re vested for a pension and you haven’t turned 55 yet, you may be eligible to withdraw your pension as a termination benefit, which may include a commuted value. A commuted value is the current overall value of your future pension paid as a lump sum. The Alberta Teachers’ Pension Plans are defined benefit plans which means that your commuted value is not based on contributions from you or your employer (this would be a defined contribution plan).
A termination benefit is meant to provide you with savings for retirement. Pension regulations require that you transfer these funds into a Locked-in Retirement Account (LIRA) that you can only access ( subject to some exceptions) during retirement. Tax rules will limit the amount that can be transferred on a tax-sheltered basis to a LIRA, resulting in some of these funds being unlocked but also taxed at source when they are withdrawn from the plans. If you have any pre-1992 service, please review the rules that apply to you on the Terminating Your Contract page.
Benefits to Withdrawing Your Funds from the Plans
- Access to some of your pension as cash perhaps during a difficult time, along with the flexibility to decide how to use that cash.
- The stream of retirement income from a commuted value is not as predictable as a guaranteed lifetime pension but could be more flexible, subject to minimum and maximum amounts of yearly withdrawals.
- You can invest your retirement funds however you’d like (though this can also be a risk).
- If your investments do well, you may have a greater retirement income than the one you would have had if you kept your funds with the plans.
- Any remaining funds from your termination benefit can be passed on to your beneficiaries when you pass away.
Drawbacks to Removing Your Termination Benefit
- If you withdraw your funds but you decide to teach again in Alberta, you’ll be starting from scratch with your pensionable service. Your previous service in the plans no longer applies, so while you may be able to buy back that service at a later date, it can be expensive and there are limitations.
- Being responsible for the outcome of your retirement investments.
- If the outcome is poor, you may end up with less retirement income than you would if you had left it in the plans.
- There are fees and costs associated with having someone else manage your investments.
- In a defined benefit plan, you receive a lifetime pension, adjusted each year for changes to cost-of-living, no matter how many years you live. By taking your termination benefit, you will no longer receive a guaranteed lifetime pension unless you buy an annuity. This means you could run out of savings in your retirement years.
- Depending on what you do with your termination benefit and your total retirement savings, there may not be money available for your pension partner. With a defined benefit pension, if you have a pension partner, that pension partner is also entitled to a pension in the event that you predecease them.
- There will be tax implications on any money that you withdraw as cash, for example the funds that you cannot transfer to a Locked-in Retirement Account (LIRA). The cash benefit is required to be taxed at a rate of up to 30% at source, depending on the amount of the cash benefit. The total taxes can even be higher depending on your other income in the year you receive this payment and will be payable when you file your income taxes. Pension money paid in cash can negatively affect your retirement income future because you may have to pay significant taxes immediately, losing the tax-sheltering benefit of receiving your pension when you retire.
A Few Other Things to Consider
This is a big decision for you and your pension partner (if you have one). An independent financial advisor can help you determine what is most important for you right now while also balancing your need to save for retirement. Be cautious when you’re choosing an advisor, as some are paid on a commission basis when you buy products. While this may not always cause a conflict of interest in their advice to you, it’s something to be aware of.
While every member’s situation is different, consider these factors that may impact your decision.
- Do you want to change careers?
- How many teaching years do you have left?
- Will you return to the plans?
- How comfortable are you in investing your own retirement income?
- Is it important that your pension partner is taken care of in the event of your death during your retirement years?
- Do you have access to other forms of retirement income and will it be enough to last you through your retirement years?
As always, we are here to help answer any questions that you may have. We do not act as financial advisors, but understanding the plan rules and workplace pensions are an important part of the decision-making process. You can contact us by email or phone. There are also a number of articles on our website about vesting, withdrawing from the plan, and purchasing service that might be helpful to you. You can look for those below.