Hi all, I just started a new job that offers employees 2 pension choices (I can only pick 1 and can't change), I'm having a tough time deciding so I figured I would post up here for some thoughts/advice.
Option 1 - Defined Benefit: Pretty similar to most DB pension plans, formula is: 1.6% x (avg of top 3 yrs salary) x (# yrs service) = annual payment. Can take it at age 60 without any reductions, or at 55 with some scaling for taking it early. Options if you leave the company before age 55 are to:
A) leave it alone and begin receiving it at age 55 or 60,
B) get paid out the lump-sum value and transfer it into a LIRA (locked in retirement account, basically an RSP that I can't touch or add $ to, could put into mutual funds), or
C) get paid out the lump-sum value and buy an annuity.
Since I'm hoping to retire in 10-15 years I would likely be taking the lump-sum value and putting it in a LIRA. This is fine, my biggest concern is there is no formula for the lump-sum value I get paid out. I have no idea what it would be, which makes it tough to factor into my FI plans.
The DB pension would use up about 2/3rds of my RRSP room.
Option 2 - Defined Contribution: This one is pretty straightforward, company contributes 5% of my salary to a retirement account that I control. Goes up to 7% after 7 years experience. I would likely be putting it into index funds. I like this one because I can control where it goes, and because I always know what the value is which helps for FI calculations.
When I leave the company I would have to convert it to an LIRA or buy an annuity, (same as above).
The DC pension would use up about 1/3rd of my RRSP room.
Some background info:- both plans are 100% employer paid (yay!)
- I'm 26 yrs old aiming for FI in 10-15 yrs, current stache about $70k
- Current salary is about $90k, expecting annual raises of about 3-7%
- I'm in Canada
- I think both plans are taxed the same, only difference is the DB uses up more of my RRSP room
My thoughts are to go with the DB as I *think* the lump-sum payout will be pretty good when I quit the company, but I don't really know for sure. Since the DB would be taking up quite a bit of RRSP room I could take the money I'm currently putting to my RRSP and use it to pay off my house, or contribute to a spousal RRSP for my partner. The DC on the other hand might net me less money, but at least I'll be in control of it.
Any feedback?
Thanks in advance!