Author Topic: Canadian Federal Government Question  (Read 1063 times)

Agronomist

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Canadian Federal Government Question
« on: April 04, 2015, 10:15:04 AM »
I recently left a position with the Canadian federal government for a job in the private industry. I resigned with the government about 1 month shy of my 50th birthday so I am eligible to pull the pension out. I also have the option of taking a deferred annuity payable at age 60. The deferred annuity is worth about $38400 per year today and since the pension is indexed for inflation will grow over the next ten years. The rate of growth will be low as it is tied to the cost of living and I think retirees got a 0.9% COLA last year. By my calculations, the pension would be worth about $42000 per year at age 60. At age 65 the bridge benefit stops as CPP kicks in and the lifetime benefit is reduced to about $38000 per year. This continues to be indexed for inflation and is payable for my lifetime. If I keep the pension with the government I would be eligible to join the health care system for retired government employees. If I pull the money out of the pension this option is gone.

I do have the option of pulling the money out. It is worth around $600,000 and about half has to be moved to a LIRA. The other half is taxable except for whatever I have room for in an RRSP. I have about $72000 of room so about $240,000 would be taxable. That means about $105,000 in taxes would have to be paid. My wife has about $55000 of room in her RRSP so after the taxes are paid we could get some back by filling up her RRSP. This would reduce the effective amount of taxes paid to around $80000.

Other considerations are: my wife has a defined benefit pension as well and she still has her job and probably will continue in it until she has 30 years of service or so. This would provide about $54000 per year in retirement. I have a pension plan in my new job that is not defined benefit but the employer matches my contributions up to 3%. The unfortunate part is that this is restricted to mostly high MER mutual funds at present. I am working on getting that changed so there would be the option of ETFs. My calculations are that at age 62 I would have about $9000 per year coming out of this pension.

I have spoken to two financial consultants who I trust who say I should pull out the pension since it does not take much of a return to match the future value of the deferred annuity even after paying the taxes. One other accountant friend I spoke to said to keep it with the government. The two financial guys also point out that since my wife has a defined benefit pension, having more control over mine would be good. It would also be more beneficial from a tax point of view in that I could take advantage of maxing out my and my wife's TFSAs which would help control taxes paid in retirement. Another consideration is that if I die before my wife she would get about 60% of my pension and when we both are gone, the pension money is gone, i.e. nothing for our kids.

So, what to do? I have a year from my departure date to make up my mind. Having actually written out the options like this helps me to realize that we have it pretty good and going either way will be okay. I guess I do worry a bit about pulling it out, paying the taxes and then having the market drop or under perform for the next few years. I do plan on working for at least 10 to 12 years so that gives some time to recover. The option of staying in the pension does reduce that risk, but I'm not sure I quite trust the government to not make changes to the pension. There has been some rumblings about removing the indexing but the retirees and working civil servants would probably put up a good fight against that. I guess there are other ways for the government to tinker with the plan.

Any thoughts out there? 

powersuitrecall

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Re: Canadian Federal Government Question
« Reply #1 on: April 04, 2015, 11:08:04 AM »
I don't have any specific advice, but we will be in a similar position to you in about 7 years time.  A difference is that I have a substantial amount in my RRSP due to private sector employment prior to working for the gov't, so I will have little room left to reduce the taxable portion if I were to take a buyout.

After running the numbers, you might realize you could probably retire now :)  As you say, regardless of your decision, you will be in fine shape.

I look forward to hearing from others on this, and hearing what you ultimately decide.

c-kat

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Re: Canadian Federal Government Question
« Reply #2 on: April 05, 2015, 06:52:37 AM »
I work for the federal government too.

I would leave the money in the plan and take the pension at 60 for two reasons:

1. the pension is guaranteed.  If you put the money in the stock market and it crashes and doesn't recover before you turn 60 you won't be able to match what the pension gives you.
2. diversification. You will have your new employer's defined contribution plan which I assume is tied to market performance and a pension which is not. best of both worlds.

Also having the health plan in retirement is a plus too.