Has your employer terminated your contract? Are you considering taking your termination benefit from the plan?
Typically, getting access to your pension funds from the plan would not normally be the deciding factor or trigger to terminate your employment contract, but in these unprecedented times some teachers are considering this. Before going down that path, there are a number of important factors you will want to consider.
Firstly, you are not eligible to withdraw your funds while you are actively participating in the plans. As your pension is based on your salary and years of service, your pension will continue to grow as long as you are employed on a teaching contract and participating in the plans.
Also, if you are a vested member and are age 55 or over or if you're a retired member in receipt of a pension currently, you are not eligible to withdraw funds from the plans.
If you're not vested in the plans…
If your contract has been terminated but you are not vested in the plans (generally, that means you don't have at least five years of pensionable service), you have a few options. If you plan to continue teaching in Alberta you can keep your funds in the plans and continue to accrue service once you secure another teaching contract. If you are leaving the province and teaching in a location which has a reciprocal transfer agreement with ATRF you may be eligible to transfer your benefit entitlement.
You may also consider withdrawing your funds from the plans, which would mean taking your contributions plus accrued interest. There is no time limit to do this, however you will want to speak to a financial planner about the tax implications of withdrawing your funds. If you keep your money in the plans, it will continue to earn interest.
If you are vested in the plans…
If your contract has been terminated but you're vested in the plans and you haven't turned 55 yet, you may be eligible to withdraw your pension as a commuted value. A commuted value is the current overall value of your future pension paid as a lump sum. The Alberta Teachers' Pension Plans are defined benefit plans which means that your commuted value is not based on your or your employer's contributions as it would be in a defined contribution plan. A termination benefit is meant to provide you with savings for retirement. Pension regulations require that you transfer these funds into a Locked-in Retirement Account (LIRA) that you only access, subject to some exceptions, during retirement. Tax rules will limit the amount that can be transferred on a tax-sheltered basis to a LIRA, resulting in some of these funds being unlocked but also taxed at source when they are withdrawn from the plans.
Benefits to withdrawing your commuted value from the plans
- Access to some of your pension as cash during a difficult time, along with the flexibility to decide how to use that cash.
The stream of retirement income from a commuted value is not as predictable as a guaranteed lifetime pension but could be more flexible, subject to minimum and maximum amounts of yearly withdrawals.
Invest your retirement funds however you'd like (though this can also be a risk).
Any remaining funds from your commuted value can be passed on to your beneficiaries when you pass away.
Drawbacks to taking your commuted value
- If you withdraw your funds but you decide to teach again in Alberta, you'll be starting from the beginning all over again. Your previous service in the plans no longer applies, so you may be able to buy back that service at a later date but it can be expensive and there are limitations.
Being responsible for the outcome of your retirement investments.
If the outcome is poor, you may end up with less retirement income than you would if you had left it in the plan.
There are fees and costs associated with having someone else manage your investments.
In a defined benefit plan, you receive a lifetime pension, adjusted each year for changes to cost-of-living, no matter how many years you live. By taking the commuted value, you will no longer receive a guaranteed lifetime pension unless you buy an annuity. This means you could run out of savings in your retirement years.
Depending on what you do with your commuted value and your total retirement savings, there may not be money available for your pension partner. With a defined benefit pension, if you have a pension partner, that pension partner is also entitled to a pension in the event that you predecease them.
There will be tax implications on any money that you withdraw as cash, for example the funds that you cannot transfer to a Locked-in Retirement Account (LIRA). The cash benefit is required to be taxed at a rate of up to 30% at source, depending on the amount of the cash benefit. The total taxes can even be higher depending on your other income in the year you receive this payment and will be payable when you file your income taxes. Pension money paid in cash can negatively affect your retirement income future because you may have to pay significant taxes immediately, losing the tax sheltering benefit of receiving your pension when you retire.
A few things to consider
This is a big decision for you and your pension partner (if you have one). A good independent financial advisor can help you determine what is most important for you right now while also balancing your need to save for retirement. Be cautious when you're choosing an advisor as some are paid on a commission basis when you buy products. While this may not always cause a conflict of interest in their advice to you, it's something to be aware of.
While every member's situation is different, consider these factors that may impact your decision.
Do you want to change careers?
How many teaching years do you have left?
Will you return to the plan?
How comfortable are you in investing your own retirement income?
Is it important that your pension partner is taken care of in the event of your death during your retirement years?
Do you have access to other forms of retirement income and will it be enough to last you through your retirement years?
As always, we are here to help answer any questions that you may have. We do not act as financial advisors, but understanding the plan rules and workplace pensions are an important part of the decision-making process. You can contact us by email or phone. There are also a number of articles on our website about vesting, withdrawing from the plan and purchasing service that might be helpful to you.