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What happens to your registered pension plan when you leave your employment?

What happens to the group registered pension plan of a person that leaves their employment?

Given that the main objective of group pension plans is to protect the employee’s right to the benefit promised under the plan the employee who is leaving his or her employment can choose from a variety of options.

What must I be provided with relating to my RRSP when I leave the company?

Often within 30 days that your employment ended, you have to receive a statement about your RRSP stating:

  • Details about the pension benefits payable to you from the plan;
  • Options you have;
  • Deadlines for choosing an option; and
  • Information about any refund(s), plus interest, that you are eligible for.

So what can I do with my group RRSP when I leave my employment?

Usually, you have a couple of options which include:

  • Ask for the amount in cash – be aware though that this will be added to income for that year and taxed;
  • Transfer it to your own personal RRSP;
  • Buy an annuity.

Asking for the money in cash

This is self-explanatory; you are asking to cash in what you are owed in from your group RRSP plan. However, once you cash an RRSP it is added to income and will have tax consequences. It’s best to speak to an accountant or a tax lawyer about what the tax consequences are if you cash your group RRSP, otherwise you may have a costly surprise come tax time.

Transfer it to your own RRSP

This option allows you to transfer your group RRSP into your own individual RRSP that is in your name. That likely won’t trigger tax consequences if you choose a transfer. If your RRSP is not locked-in, your withdrawal of funds is restricted. Once again, if you cash an RRSP or a portion of a RRSP it will trigger tax consequences.

Annuities

Annuities are investment vehicles in which you invest your money in a financial institution and in turn, you will be provided with an income.

An annuity is different from other investment vehicles in that it has income defined after the purchase or investment period. The investment is usually paid out in a defined way, such as through monthly payouts in order to guarantee a guaranteed supplement retirement income.

There are two types of annuities:

  • Life annuities: annuities that are paid to the purchaser until his or her death; and
  • Term annuities: they are paid to the purchaser for a fixed amount of time, for example five or ten years.

When annuities are paid out, payments include both interest and a return of capital.

If you purchase an annuity with the proceeds you get from your group RRSP then you may be entitled to tax advantages.

There is a difference between a registered and non-registered annuity, especially when it comes to tax consequences.

As RRSP’s, and related products, often trigger tax consequences it’s often best to discuss your options with a financial advisor, accountant and/or tax lawyer especially if significant funds are involved.

Read more:

What happens if I leave my employer?

Tax Annuity Laws in Canada