Thinking of Removing Your Transfer Value?
Plan members thinking of retiring may be considering removing the value of their benefit in a lump sum. Below are some things to consider prior to making your decision.
The pension plan is designed to provide members with reasonable retirement benefits based on the time the member contributed to the plan. The plan is expected to provide members with better overall retirement income than other alternatives for retirement savings.
The pension plan tends to provide relative security, and expects to pay a pensioner for his or her lifetime no matter how long the person lives. With a survivor pension, after the pensioner dies, the plan will also pay the surviving spouse or partner a pension for the survivor’s lifetime, no matter how long he or she lives.
The simplicity and security of the plan are attractive for members who are eligible for an immediate pension. The plan also offers some flexibility for other pension options, but balances flexibility with not becoming overly complex.
Whether electing a monthly pension or removing funds from the plan, members may want to get professional advice, but be careful of possible bias in any advice received. Advice from an accountant or financial analyst who charges only for his or her services may differ from that of someone who is being paid a commission for getting you to make certain investments. In some instances it may even be worth getting a second or third opinion, particularly where someone is providing you with guesses of future life expectancy or investment returns. You may want to contact your employer to determine if they offer assistance such as financial planning through an Employee Assistance Program (EAP program).
Members with ten or more years of service may also want to consider not transferring funds out of the plan until they are at least age 55, as the transfer amount can be significantly lower prior to age 55. If you remove funds from the plan, there may also be implications for other employer sponsored benefits like group life insurance.
The pension plan does not operate for profit, and benefits from having a large number of members and an expectation that it will exist for longer than individual members tend to live. The pension plan can take advantage of investment opportunities which individuals likely can’t and it can invest at significantly lower costs. The plan can also diversify and not be overly concerned with market cycles or life cycles of members. As a result, a member who receives a pension from the plan rather than removing his or her funds will generally receive not only better benefits on average, but also more secure benefits. The plan is sponsored by the Province of Manitoba, which is generally seen as providing more security than individual investments.
Although the board and its actuary have expressed concerns with plan funding, this plan tends to be better able than an individual to ride out market fluctuations. A degree of caution is built into the assumptions used by the board and the actuary, and the best estimate is that the plan is well funded.
The pension plan is designed to provide alternatives for survivor and beneficiary payments after a pensioner dies. There are however, limits to the flexibility the plan can reasonably provide.
If you’re single and in average health, or if you have a spouse or partner and both of you are in average health, the pension plan is designed to provide you with better overall retirement income – on average - than if you transfer money out of the plan. This may however depend on how markets are performing during your retirement, and after you pass away if you have a spouse or partner.
The plan does not require a member to be constantly watching investment performance and cash-flow through retirement or make any adjustments as markets change.
There are inevitably some situations where the pension plan may not suit a particular member.
You, your spouse, or your partner, have significant life shortening health issues. The pension plan is designed to pay pensions for the life of the member, and with a survivor pension, pay a surviving spouse or partner for his or her lifetime after the pensioner dies. That can provide relative peace of mind, particularly if you’re concerned with running out of money later in life. The impact of this however is that where a member has a significantly shortened life expectancy, or where his or her spouse or partner has a significantly shortened life expectancy, transferring funds out of the plan may provide a better overall benefit, plus greater flexibility in timing of income and beneficiary entitlements.
You may want greater flexibility in monthly payments or distribution after death. The plan pays the pensioner the same monthly amount for his or her lifetime, and for a survivor pension, pay that survivor the same monthly amount for his or her lifetime after the pensioner dies (with few exceptions, such as cost-of-living increases and changes due to integration). The steady and reliable income is attractive for almost all members who are eligible for an immediate pension. Some members may however desire more flexibility.
If you have expertise in investing or simply want to increase your control over your money (increase your personal risk and possibly potential rewards), or if you are fortunate enough to live out your retirement during a relatively positive market cycle, transferring funds out of the plan may provide a better overall benefit.
The board does not provide financial planning. This information is intended to provide elaboration on this plan as a government sponsored defined benefit pension plan, and indicate some features of the plan which a member may want to use in her or her decision making. It is not advice and not exhaustive, but will hopefully help members make informed decisions about their pension options and entitlements.