Author Topic: keeping $ in public sector pension plan vs lump sum for RRSP  (Read 316 times)

bitingbutterfly

  • 5 O'Clock Shadow
  • *
  • Posts: 4
  • Location: BC
Hi folks,

Wondering if I can get some collective brainpower to help me choose my best option.

Hereís the story:
I currently work for the government with a defined benefit pension plan (DBPP #1). I contributed to the plan for 2.5 years before moving to a different employer, also with a DBPP. I worked for employer #2 for six months, also a public sector employer with a different DBPP. I quit that and I am now in a new role with the government with much higher pay, contributing again to DBPP #1. I now have to decide what to do with my pension contributions I made to DBPP #2.

These are my options according to all my paperwork between the plans:
1. Keep my $ in DBPP #2, and will receive $87/mo at age 55
2. transfer my $ to DBPP #1, which will give me an additional $45/mo in DBPP #1  plan at age 55.  I wonít get credited for all my service from plan #2, but I will be able to purchase the shortfall if I choose (not sure what the cost would be at this time)
3. Pull the $ from DBPP #2, which would be just over $10,000 and transfer to an RRSP.

I went a long time ago to  a seminar from pension plan #1 that, for reasons I canít remember, had me convinced that if I ever had the opportunity to purchase back service when you temporarily left the plan, itís the best deal possible. The  math isnít working for me but I feel like I donít know enough about what all this means.

For what its worth, I did a simple calculation of investing the $10k for 20 years at a 6% annual return, and if I were to then start pulling 4% of the money at that time, would be roughly $1,200/year.

Additional info:
- currently age 34 and have wild plans on retiring by age 50 if I can swing it (or even earlier if I can). I am undecided as to whether I want to stay in this position until retirement, but it seems to be the best gig I have found thus far in my career (I do not enjoy my day job)
-  I have plenty of RRSP room and would invest it in index funds, which I currently have in a high risk allocation


Mighty Eyebrows

  • Stubble
  • **
  • Posts: 207
  • Location: Vancouver Island, Canada
Re: keeping $ in public sector pension plan vs lump sum for RRSP
« Reply #1 on: June 18, 2022, 11:54:04 AM »
I have very little knowledge of DB Pension plans. There are a few experts over at FWF, which might be a better place to ask this kind of question?

https://www.financialwisdomforum.org/forum/


bitingbutterfly

  • 5 O'Clock Shadow
  • *
  • Posts: 4
  • Location: BC
Re: keeping $ in public sector pension plan vs lump sum for RRSP
« Reply #2 on: June 19, 2022, 09:46:52 AM »
Thanks Mighty Eyebrows, thatís a good suggestion. I will post over there and see what happens.
Also, hello from a fellow Vancouver Island person!

sixwings

  • Bristles
  • ***
  • Posts: 358
Re: keeping $ in public sector pension plan vs lump sum for RRSP
« Reply #3 on: June 20, 2022, 02:27:50 PM »
Take the lump sum and put in your RRSP. That $87 won't grow over the next 20-30 years, it'll be $87 in 30 years which after inflation will be basically nothing. If you were in your 50s and looking to retire in the next year or so it would be fine to keep it as a pension, but not with the timeline you're looking at. In 16 years that 10K will be worth 30K at a 7% ARR, which is $100/month at the SWR of 4%. In 30 years when you'd actually take the pension that 10K is worth $81K with a monthly payment of $271. 

Pension plans want you to keep the money in the plan and will always push you to keep it there, it's very rarely actually a good idea. DB pensions are generally not great for FIRE, it's great for people who suck at saving, will stay in a DB pension org for 30+ years, and will retire at 60+, but it's really bad if you're a good saver and looking to retire early. The returns you get are quite a bit lower than S&P500 30 year averages and it's far less flexible, has penalties for early withdrawals, and if you die early there's nothing in your estate (depending on the options available in your plan, but for a beneficiary to get something there's a penalty for that as well).

I know a lot about DB plans from working at the BC Pension Corp for a number of years in leadership roles, happy to help!

Also hi from another VI person!
« Last Edit: June 20, 2022, 02:41:53 PM by sixwings »

Goldielocks

  • Walrus Stache
  • *******
  • Posts: 7000
  • Location: BC
Re: keeping $ in public sector pension plan vs lump sum for RRSP
« Reply #4 on: June 21, 2022, 07:36:28 PM »
I put this on my bookmarks years ago.  Great discussion thread on similar topic.

https://forum.mrmoneymustache.com/investor-alley/to-commute-or-not-to-commute-(your-pension-value)/msg0/?topicseen#new

Goldielocks

  • Walrus Stache
  • *******
  • Posts: 7000
  • Location: BC
Re: keeping $ in public sector pension plan vs lump sum for RRSP
« Reply #5 on: June 21, 2022, 07:40:25 PM »
Generally, DB plans are more lucrative to keep / use when you are contributing over age of 40.

The lump sum valuation is calculated based on current interest rates, to be equivalent to dying at age 85 (example).   So if interest rates are very low, then the commuted value tends to be worth more in your hands, especially if you are under 40 (if you invest, not spend it, of course).

I had a client who had a DB plan in her 20's, left the job after 4 years, and forgot about it.  When she was retiring, she had to decide whether to take it as a small pension or as a lump sum.    She was one of the few where the lump sum was far, far ,far  less than the value of the small monthly pension. Why? the way it grew in the plan, her age, etc. versus the nominal interest it was default allocated.

FIRE Artist

  • Handlebar Stache
  • *****
  • Posts: 1005
  • Location: YEG
Re: keeping $ in public sector pension plan vs lump sum for RRSP
« Reply #6 on: June 23, 2022, 01:01:30 PM »
Sixwings is 100% correct.

Also, your lump sum payout will also decrease with increasing interest rates so don't delay in making the decision. 


Posthumane

  • Bristles
  • ***
  • Posts: 326
  • Location: Alberta
    • Getting Around Canada
Re: keeping $ in public sector pension plan vs lump sum for RRSP
« Reply #7 on: June 23, 2022, 03:50:36 PM »
I was in a similar situation a few years back, moving from federal public service to another federal plan. In the end I decided to keep the funds where they were. If I'd only had a few years of contributions and lots of RRSP room I would have probably elected to take the lump sum transfer value, but a large chunk of my transfer value would have been outside of RRSP limits and would have been taxed as income in that year.

Another thing to consider is how the new pension plan is structured. If it's (number of years of service) x (average salary over the best 5 years) like many federal plans are then it might be worthwhile transferring to the new plan. That 45/mo might grow if your pay grows. Then again, if you aren't going to be in this work for a long time it might not grow enough to make it worthwhile.