Let me know if this sounds familiar… you open the mail and there’s your annual pension statement. It reads “if you retire at age X, you can expect a monthly pension of $Y.” After some quick mental math, you realize that $Y isn’t going to quite be enough for the retirement plans you have, so you throw away the statement and prepare for another year of work.
But what if it didn’t have to be that way? What if you’ve been focusing on the wrong number this whole time? What if there was a way to “unlock” some of your pension to fund the early years of your retirement?
Pension “unlocking” is a very real thing. Instead of taking the monthly annuity payment, you convert some or all of the lump sum (commuted value) into a self-directed and managed account. The rules differ far too much from province-to-province to address here, but the key point I want you to take away today is that you should be asking the questions: “can I do it?” and “is it right for me?”
Your first step is to understand if you can or can’t unlock some of your pension. In Manitoba for example, our provincial pension legislation allows for a one-time unlocking of up to half of the pension proceeds into an account called a “Prescribed Registered Retirement Income Fund” or PRRIF. If you understand the rules of your province, you can move on to the next question. Contact me for a list of provincial options depending on where your pension is legislated.
Is it right for you? This is a much harder question to answer and unique to each family. All financial decisions come with tradeoffs, pension unlocking being no exception. Examining the pros and cons can help lead to an informed decision:
Pros:
• Unlimited access to a larger pool of money at the start of your retirement.
• Potential for higher retirement income than the annuity payments if investment holdings perform well.
• Flexibility to adjust, up and down, your taxable income in retirement years.
• Unused funds can be bequeathed to heirs, for a potentially larger estate.
Cons:
• The funds need to be managed by yourself or a professional (no longer “set and forget”).
• Guaranteed income for life may be lost by poor investment performance or overly-aggressive withdrawals.
What kind of scenarios would you recommend a person unlock their pension? Glad you asked! If you go into retirement knowing you need higher income in the early years (finish paying off debt, extensive travel, expensive hobby, etc…), can handle the volatility that inherently comes with investing, and have the self-discipline to only take planned withdrawals and not splurge, unlocking your pension may be right for you. If you want to leave more money to your heirs, want to have more flexibility in your retirement income, or simply want more control of your retirement, unlocking your pension may be right for you.
If you lose sleep over what financial markets do, find it difficult to stick to a budget, or don’t want an active role in income planning, you may be best to stick with a fixed annuity plan.
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