Federal pension vs locked-in RRSP

[Acadian]

I need to decide before October 2009 if i want to keep my pension with the feds or transfer it to a locked-in personnal investment.

The estimate they gave me is (roughly):

- 100K transferrable
- 40K above tax limit (i need to cash it it as income)

Of that 40K, i think i'll have around 15K of room in my personnal RRSP. Which means, 25K is taxable.

I have 10.5 years of service (so 21% of my average salary when i retire at 55) There's also the fact that if i retire with a fed pension, i have access to their medical benefits at retirement.

I've spoken to 2 financial advisors and both told me to go the self investment route. I know they don't make any money unless i invest with them, and i wasn't convinced by their numbers.

Has anyone here ever made this kind of decision?

Does anyone know of an independant advisor, someone who charges by the hour to give advice instead of by comission?

I live in New Brunswick, 36 years old and have a provincial job right now (0.5 years of service so far).

Thanks!

[pitz]

I need to decide before October 2009 if i want to keep my pension with the feds or transfer it to a locked-in personnal investment.

The estimate they gave me is (roughly):

- 100K transferrable
- 40K above tax limit (i need to cash it it as income)

Of that 40K, i think i'll have around 15K of room in my personnal RRSP. Which means, 25K is taxable.

I have 10.5 years of service (so 21% of my average salary when i retire at 55) There's also the fact that if i retire with a fed pension, i have access to their medical benefits at retirement.

I've spoken to 2 financial advisors and both told me to go the self investment route. I know they don't make any money unless i invest with them, and i wasn't convinced by their numbers.

Has anyone here ever made this kind of decision?

Does anyone know of an independant advisor, someone who charges by the hour to give advice instead of by comission?


You're absolutely correct to be suspicious of advice given by the local mutual fund jockeys that you're dealing with. Have you looked into options of transferring your pension from the feds to the Provincial Government's plan?

As for where you would get relatively unbiased professional advice, I would suggest that you look in the phone book for 'divorce lawyers', give one of them a call, and ask for a referral to an accountant or a consultant who is experienced in doing pension calculations.



I live in New Brunswick, 36 years old and have a provincial job right now (0.5 years of service so far).


Yeah, I don't know what the answer would be for you -- if you were to self-manage it by putting it into cost-efficient ETFs, and be a little more aggressive on the equity side, I suspect that you could do better than leaving it with the federal government. If you take it to a financial advisor, and pay traditional mutual fund MERs, then I suspect that you'll do somewhat worse than the government. Another thing that is attractive about a federal government DB plan is that it is implicitly a form of an annuity, in that, if you live past the actuarially determined 'average' age of death, you could really stand to benefit immensly, and unlike an annuity you buy from a life insurance company, a pension plan annuity really doesn't cost anything (ie: there's no 'profit' to pay Manulife's shareholders for managing the thing).

[TopTaxGuy]

You need to consider whether you can reproduce a rate of return that will satisfy your income needs for life that is more than what you will get with the pension.

There are soft issues to consider as well: Will your pension provide you other medical and dental benefits? Will you continue to receive life insurance? How long to you expect to live (will you outlive your money if you take the commuted value)? Do you have inflation protection in the pension?

The cash payout is not always the best option.

[someguy91]

Without doing the math... I'd say keep it in the federal pension. Tax deferrence is significant enough over time...

As well, do you really want to think about that money anyway? The government is liable for it... and they basically provide a free investment service. I would venture to guess, without knowing you, that the return spread differential is probably not significant enough for you to make the jump into self-direction. You do work for the government after all...

[ray420]

Why do you want to take it out?

[randomthoughts]

I'd consider leaving it. It'll be safe where it is and there's no risk. You could consider transferring the credits to your provincial pension, however, your provincial pension might be privately managed. If so, then having pension in 2 places is probably best.

But I'm not an expert.

[Beachdown]

The Ontario provincial goverment has a pension transfer agreement with the federal public service. I would think that would be the best option, no?

[pitz]

The Ontario provincial goverment has a pension transfer agreement with the federal public service. I would think that would be the best option, no?

Maybe....if he lived in Ontario and not New Brunswick :).

[Beachdown]

Ooops. Didn't see that, thanks pitz.

New Brunswick also has a PTA.

[89fan]

I worked for the feds a long time ago, very briefly. I was with the union (paying dues) for 1.5 yrs. I chose to transfer my pension into a locked in RRSP. Although mmine was really small $10k. They estimated that if I left my pension with them I would receive a whopping $125 per month at the age of 65, $125 per month in 35-40 years will not be anything...not that it is today!

Personally I figured that one way or another I would be able to grow my money quicker/better.

[Ryan5459]

I would keep it with the federal government. Assuming your average salary during your top five years was $70K that should translate to about $15K a year for retirement.

To match that you would need to grow your $100K investment to about $300K at retirement. Definetly not impossible but there is a risk.


On also agree 100% with pitz - never trust a saleperson trying to sell you a mutual fund.

[Acadian]

Thanks for the input guys!

To answer a few questions:

Why would i want to take it out? Well, if i can do better on my own. There's also that taxable 40K that could come in handy as a downpayment on a mortgage.

More facts...my average salary (best 5 years) with the feds is roughly $68K. And my pension is indexed to the consumer price index, which means (for arguments sake) it goes up about 2% per year. My current provincial salary is roughly $59K. The feds retire at 55, the provincial retires at 60.

This means:

1) if i cash it out, i need to invest in something that would match the fed pension as well as the indexation it has

2) if i transfer it to provincial (i'm waiting for the transfer estimates), it means my salary here has to catch up to my best 5 years at the feds as well as the indexation of my fed pension

3) i leave it with the feds and have 2 pension checks coming in when i retire

[Acadian]

I was told that my pension is indexed as of the day i quit my job. And it keeps going once i officially retire. But i'll ask them again to make sure.

As for transferring to provincial....they are making estimates for me, it's in their hands already. But i doubt i'd transfer because of the indexing of my fed pension....my salary here wouldn't catch up to my indexed pension salary fast enough.

[Beachdown]

I ran your numbers on the pension calculator.

You won't collect the full 21%...you take a 25% deduction if you retire at 55. Your gross monthly pension will be $890. If you wait until age 60 to collect, it will be $1189.

At age 65, both of these would be reduced when you start collecting CPP.

Your pension begins indexing when you begin collecting (has to be after age 55), not when you leave for another job.

[billiam]

Are you sure about the age 55 requirement for indexing commencement?

http://www.tbs-sct.gc.ca/pubs_pol/hrpubs/pensions/ypp1-eng.asp#Toc497204655

Pension Increases (Indexing)

Consumer Price Index

Your basic pension benefits increase each January after you retire to take into account increases in the Consumer Price Index (CPI). The first increase payable the year after you retire will be prorated to reflect the number of full months since your retirement date. If there is no change in the CPI, or if it drops, your pension will not be adjusted that year.

If you retire with entitlement to a deferred annuity, your basic pension, when it is payable, will be increased by the total accumulated percentage increases from your date of retirement.

[billiam]

Further references:

http://www.tbs-sct.gc.ca/hr-rh/bp-rasp/pensions/wyo-evo/wyo-evo28-eng.asp

and

http://www.tbs-sct.gc.ca/hr-rh/bp-rasp/pensions/faq-eng.asp

[Acadian]

billiam, thanks for the links. I was fairly certain of the indexing starting right away, but i'll still ask my pension advisor when i call him. Better safe than sorry. lol

[Beachdown]

Not entirely sure. My interpretation is that indexing begins when you retire and start drawing the pension, in this case at age 55.

[Beachdown]

I just saw your new links. You're correct, in that example it clearly states it was indexed at 3% annually.

To the OP, I would talk to an independant financial advisor. Does your current employer have an employee assistance plan similar to the feds? If so, they might offer free financial advisory services and could lay out ALL your options.

[Acadian]

I would love to talk to an independant advisor, but i don't know where to find one. Any suggestions?

[Thalo]

I've done a lot of DB pension analyses for people with many different pension plans (including the fed gov't). On average the results are as follows:

If you transfer your pension to a LIRA and invest it at least with a moderate level of risk and we assume a moderate risk long-term growth rate you should be able to generate a higher income at retirement.

If you transfer it and invest it with little or no risk you will generate a lower retirement income than if you had left it.

Thing is the pension left as is is guaranteed income at retirement (so long as the pension fund remains solvent) and if you transfer it you have to at least take on some risk in order to match it. Throw in retiree benefits and leaving the pension becomes even more favorable. Essentially it comes down to whether or not you want to take the risk. That money invested aggressively could potentially generate more income, even taking into account the other pension benefits.

[Bford]

i faced this issue as an amateur, took it out and my impression too was if you take the risk you may get more, but you face things like the recent market cut in half.

also the feds have i believe 100% inflation protection. Alberta's government offers only 60% inflation protection. so i am now not sure whether to transfer a federal pension to the province. i know i would get less inflation protection, and only have access to the provincial, not federal medical plan on retirement. but possibly bigger than all that is that the benefit is calculated on 2% times years of service times the best 5 years which is one's last 5 years of service for virtually everyone. so having the years of service larger with you later employer could be worth much. i.e. 2% times my old salary times a few years may be less then 2% times my best 5 years times those same years if I take the pension from one employer to the other.
Any one else have an impression whether this best 5 year thing (meaning transfer the pension to the later employer) trumps better inflation protection with the feds (which means keep it with the feds). the answer might depend how bad inflation gets. an option might be to resume with the feds late in ones career to get a better 5 year top average salary.

[sockboy]

Bford hints at something to consider. Do you think there is a fair chance you will ever return to the fed gov't? If so, leave it in. Then when you return (likely at a higher salary), you already have those years banked.

I personally would leave it in.

[Acadian]

To update...

I talked to a guy i know personally. He's an investment manager at one of the big banks. He told me on the phone "the odds are you should leave it with the feds". So i sent him my numbers and he replied back to me that, in my case, it might actually be better for me to take it out and invest it. Here's the numbers he gave me...

------------------------

Option 1:

$14,100 from 2008 and indexed at 2% will give you approx. $23,000 in Pension income at age 60 if you leave the funds with the Federal Gov't.

Option 2:

Take the $101,861 and invest the funds. I used 3 scenarios..

5% would provide +/- $20,000 in annual income
6% would provide +/- $24,000 in annual income
7% would provide +/- $30,000 in annual income
-----------------------

On top of that, i would have to cash out $40K of this pension above tax limits (not included in the $101K).

$15K of which i can hide in my RRSP and the rest is taxed.

What do you guys think? He told me the numbers he used were conservative. He is now suggesting i take it out and invest it.

[Cypherus21]

^I don't see any exceptions to note with those balances. For your interest, stock market returns average 12%, mutual funds at 9%, bonds (if held to maturity) at 6%, and interest (GICS) at 3%. So those RoRs are right in the middle and seem appropriate. However, it is still based on speculation and contingent on the investment mix (allocation) and portfolio risk (i.e. you require a return of 6% commensurate to the amount of investment risk but the portfolio returned you 4%; while still positive (around GIC returns), you didn't meet your expectations).

[sockboy]

I would leave it in because the income is guaranteed - that is a pretty rare thing. The health plan also has value.

[charliebrown]

If your pension will be indexed immediately, then there's no need to take on investment risk (i think that's the whole purpose of a DB plan anyways -- the employer is screwed if its investments tank; unless you work for GM/AC/Nortel/etc)

[Wing Nut]

I'm a CFP and have done calculations for a number of clients showing the ROR they would need to get to beat the pension. Very generally, the returns are not all that high. If often comes down to the uncertainty of the returns. My own pension was transferred to a LIRA because it was some 16 years ago and I felt I had more than enough time to beat the DB pension plan, while in my wife's case I left it in her DBPP because it was only a couple of years ago and I didn't want her to give up the sweet annual income for life.

I have had clients who insist on transferring the pension out once they find out what happens on death to pension assets.

[Acadian]

Wingnut,

You converted yours and left your wives in tact. What would you do in my situation?

Thanks!

[Ride-On]

So, I have a different question for you, that may seem entirely unrelated:

Why do you work for the public service?

I do not mean this to be an insulting question. Many people I know and work with in the public service (note: I am not a public servant) would rate the issues of stability and benefits as 2 of the top reasons to stay in the public sector.

To me, answer that question honestly and you'll have a significant indicator as to which way you should go with your pension. The higher they rate, the more I would recommend sticking with the status quo.

[Wing Nut]

Wingnut,

You converted yours and left your wives in tact. What would you do in my situation?

Thanks!

If you send me a PM with as many details as possible, I'll take a look at your situation. I don't come here regularly so when you PM me provide an email address.