Whether you’re considering changing jobs, switching careers or leaving your job entirely to discover your passion, be sure to give careful thought to the financial implications. That includes your pension, your profit-sharing plan and your investment strategy.
If you’re leaving a job with a pension, you’ll need to decide what to do with the funds you’ve accumulated – but it depends on what type of pension you have.
Defined Contribution Pension Plan (DCPP)
In a defined contribution plan, you know how much you’ll pay into the plan, but not how much you’ll receive when you retire. In most cases, both you and your employer contribute a defined amount to the plan and your contributions are pooled into your choice of pre-selected funds. The amount you receive when you retire depends on how those investments perform over time.
When you leave a job with a DCPP, you can:
- Transfer your pension money to invest it elsewhere
- A locked-in retirement account (LIRA) – since the funds come from a registered pension there are certain restrictions on withdrawal limits and timing, but you would have the ability to transfer the existing savings to a LIRA with the financial institution of your choice
- Leave your pension where it is and collect your monthly benefit when you turn age 65.
- Buy an annuity.
- Cash it out if it’s a very small amount.
Defined Benefit Pension Plan (DBPP)
A defined benefit pension plan provides you with a regular and predictable income after retirement. Usually both you and your employer contribute to the plan, and contributions are pooled and invested. Your retirement income is calculated based on your salary and number of years you contributed to the pension plan – a factor amount that does not depend on how the investment performed.
When you leave a job with a DBPP, you can:
- Transfer your pension to your new employer’s defined benefit pension plan if they have one.
- Leave your pension in your current employer’s pension plan – you’ll receive a pension benefit when you retire.
- Take the “commuted value” of your pension money and invest it elsewhere. A portion can be transferred to a LIRA and a certain portion may be received as taxable income on receipt. The amount that is considered taxable is based on your age at the time of commutation.
Your Deferred Profit-Sharing Plan (DPSP)
A DPSP is an employer-sponsored retirement plan that allows an employer to share business profits with its employees. Only employers can make contributions to the plan, and employees are not required to pay taxes on contributions until they withdraw money from their DPSP.
When you leave a company, you can choose to:
- Transfer your DPSP to an annuity, RRIF or RRSP – transferring directly to an RRSP defers taxes, particularly if you hold a large amount in your DPSP.
- Cash out the amount – you’ll have to report it on your taxes and pay income tax at time of withdrawal.
Your investment strategy
Job transitions can be a great opportunity to check in with us to talk about how you’re doing with your financial goals and think about adjustments you might make to your investment strategy. For example, changing jobs, particularly if you’re moving from a more established role into a more entrepreneurial endeavour, could affect the amount of risk you want to take in your investment strategy. If you’re earning more, you may want to consider contributing more to RESPs, RRSPs or other investments.
Changing your career direction is exciting – talk to us about how to adjust your retirement plan so you’re financially prepared for this life change.