# Termination: Municipal Pension Plan



## Timbyt (Mar 12, 2018)

Hello All,
I have a situation here regarding termination of a Municipal Pension Plan (in BC). 
My family profile is:
· Family net income of 60k with me being sole provider
· May get up to 80k within next 10 years
· Bank is RBC
· Has mortgage to be paid off within next 10 years
· Wife’s age is 40

My situation is as follow. My wife left her job as a nurse to become a stay-at-home mom recently. Her pension is now with “Municipal Pension Plan” (MPP) and the following info is on her “Termination Selection Statement”:
· Indexed pension (I think, because it says “your pension may be increased for cost-of-living adjustments” but are not guarenteed)
· Looking at MPP’s website, the annual increase is approximately 1.5% annually for the last 10 years history)
· Option 1 Deferred Lifetime Pension:
· $700 monthly payment from age 55 to age 65
· $544 monthly payment from age 65 on

· Option 2 Payment of Commuted Value of Pension:
· Locked in payment of $80,000
· Plus cash payment “that is in excess of income tax act limit” of $35,000
· 30% of it may be taxed, “The Corporation withholds income tax on all all taxable lump sum payments… 30% for payment in excess of $15,000
· After it goes into RRSP, should we cash it out? Reason being I expect our income to increase in the future and there’s a high chance that I will continue to work full-time when my wife is eligible to receive her pension. In other words, I think our income right now is lower than what it will be when my wife is eligible for her pension.
· Someone mentioned income splitting but I don’t know if that applies in our situation

Questions I have include:
· I’m leaning towards the payout option because I’d rather invest the money ourselves. But the pension is indexed so maybe I should defer?
· If Payout option selected:
· Where to put locked-in portion? LIRA, LIF, or insurance company? Do you have recommendations for high and/or moderately risk ones?
· Cash payment:
· If we put cash payment into TFSA & RRSP, will we still lose the 30% tax withhold by the Corporation? Should we put into RESP or should we max out TFSA/RRSP first?
· Can you recommend high and/or moderate risk TFSA/RRSP?

Your opinion will be greatly appreciated… Thank you.


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## MrMatt (Dec 21, 2011)

I'd run the numbers myself if I were you. My first look suggests keeping it in the pension plan.
What rate of return would you have to make for your investments to outperform?
This exercise might take some time, but it's also a big $$ decision (it is over $100k)

It's locked in, I'd put it in a LIRA. 

"Do you have recommendations for high and/or moderately risk ones?" << That is a question of what investments you make within the account, not the account type.
It also leads to asking how much investing experience do you have?


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## Eclectic12 (Oct 20, 2010)

Timbyt said:


> ... Indexed pension (I think, because it says “your pension may be increased for cost-of-living adjustments” but are not guarenteed)


I would make sure of the details of this part. With only fifteen years until payout, having indexing for sure IMO is a good thing.



Timbyt said:


> ... 30% of it may be taxed, “The Corporation withholds income tax on all all taxable lump sum payments… 30% for payment in excess of $15,000


I don't think this is income tax but the withholding tax, similar to the withholding tax on RRSPs or on employment income. Once the annual tax return is filed, the final income as well as tax will be known then likely this 30% will be taken into account. If it was too much, then there will likely be a refund. If it was too little, then a tax bill.



Timbyt said:


> ... After it goes into RRSP, should we cash it out?
> Reason being I expect our income to increase in the future and there’s a high chance that I will continue to work full-time when my wife is eligible to receive her pension. In other words, I think our income right now is lower than what it will be when my wife is eligible for her pension.


I would look at funding both your TFSAs from the RRSP (after double checking your assumptions about retirement income). Anything taken out will have the tax this year and will give up the tax deferred growth.





Timbyt said:


> ... Someone mentioned income splitting but I don’t know if that applies in our situation


Not an expert but from what I have read, I don't believe RRSP withdrawals are considered pension income that is available to split.
https://www.taxtips.ca/filing/pensionsplitting.htm
https://www.taxtips.ca/filing/pensiontaxcredit/createpensionincome.htm

Maybe someone who has looked more thoroughly into it can comment.




Timbyt said:


> ... Questions I have include:
> I’m leaning towards the payout option because I’d rather invest the money ourselves. But the pension is indexed so maybe I should defer?


The other question is what is your investing experience/results like. By managing it yourself, losses are losses with nothing making up for them versus the pension where losses are made up by the plan sponsor.




Timbyt said:


> ... If Payout option selected:
> Where to put locked-in portion? LIRA, LIF, or insurance company?


My understanding is that she can't touch the $$ until age 55 or greater ... unless she qualifies for one of the exceptions such as too small an amount, financial hardship etc.
That means some form of locked in account with no contributions or withdrawals (i.e. no LIF as LIFs payout). 

LIRAs can be provided by many financial institutions (FI) with different rights for controlling the investments. For example, I have at my discount brokerage an RRSP and a LIRA. The investment choices available are the same in both.

In this option, I'd recommend figuring out the plan for investing the $$ first then what FI as well as what investment choices you go with.




Timbyt said:


> ... Should we put into RESP or should we max out TFSA/RRSP first?
> Can you recommend high and/or moderate risk TFSA/RRSP?


With a short time frame of about fifteen years - why ask for high/moderate risk investments?
What investing has already been done with what results?

It seems contradictory to want to invest the money yourself but appear to be without an investing plan or idea of what to invest in. It makes me think you might repeat what some others have commented they observed. The pension payout was taken as "I can invest better" but the actual performance was far worse - causing regrets that the indexed pension was left.

By leaving the pension, the work of managing it falls to your family ... where the results will be the results whether it is better, the same or worse. 
Some preferred to leave the $$ in the pension to give a base of income, allowing them to take more investment risks with other money.


Cheers


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## gardner (Feb 13, 2014)

Eclectic12 said:


> Not an expert but from what I have read, I don't believe RRSP withdrawals are considered pension income that is available to split.


No, but RRIF income is splitable (as long as the person withdrawing is 65+) and there's no problem converting or partial converting RRSP-->RRIF


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## latebuyer (Nov 15, 2015)

Just a note that i've been playing with the pension plan estimate online for my municipal pension plan and if this is accurate i can retire at age 60 with an unreduced pension due to a bridge benefit to 65. Your wife may want to check this out. I'm pretty excited about this.


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## latebuyer (Nov 15, 2015)

Does anyone know if you can still work (for another employer) and take the pension?


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## Retiredguy (Jul 24, 2013)

latebuyer said:


> Does anyone know if you can still work (for another employer) and take the pension?



You cannot be receiving a pension from the Municipal Pension Plan and also be contributing to it.


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## Eclectic12 (Oct 20, 2010)

Retiredguy said:


> latebuyer said:
> 
> 
> > Does anyone know if you can still work (for another employer) and take the pension?
> ...


Interesting ... though as long as the other employer is not part of the Municipal Pension Plan - any contributions would be to a different pension plan, if any contributions are made, n'est pas?

At work, some specialists seem to retire, get bored then start working again. I seem to recall one of them complaining about how their total compensation in this situation had dropped as they weren't earning more pension credits.


Cheers


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## twa2w (Mar 5, 2016)

latebuyer said:


> Does anyone know if you can still work (for another employer) and take the pension?


Yes, but not if the employer falls under the Municipal pension plan where you would have to contribute.


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## Retiredguy (Jul 24, 2013)

I am in receipt of a pension from the BC- Municipal Pension Plan.

Indexing is NOT guaranteed but historically has always been awarded. It is based on the September CPI. The plan is actuarially reviewed every 3 years and the last one to the end of 2015 showed it to be in surplus - 104%. It is the 6th largest pension plan in Canada. Indexing comes from a separate account and is only awarded if the funds are available. This inflation account is under strain because of the ratio of those working versus those receiving pensions is declining. Once CPI is awarded funds are taken out of the inflation account and transferred to the pension account. Once you get the indexing for the year it becomes part of the guaranteed portion of the pension and will not be reversed. Because the inflation account is under strain, each 3 year period after actuarial review the Board of the Trust sets a max that can be awarded, each year, for the subsequent 3 years. The max is presently _up to_ 2.1%. 

My Opinion is take the deferred pension - Full stop.

Its not clear to me whether the 35K is part of the 80K or not. When I retired I was about to get an immediate pension but because of my age I also received the same letter and had the payout option. The amount of the taxable portion will be added to your wife's income for the year in which she receives it and will be taxed accordingly. Only if she has sufficient RRSP room can she put it into an RRSP.

To be blunt, I believe you will live to regret it if you and your wife sign off to not take the deferred pension (which is 700 now but will increase each year.)

No time to added more comments right now.


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## latebuyer (Nov 15, 2015)

I was just reviewing the Municipal pension plan information and it looks like you get your extended health subsidized too. 
https://mpp.pensionsbc.ca/extended-health-care-plan-premiums

It does say it is not guaranteed but perhaps the fact they won't have to subsidize people's msp benefits anymore will make it more sustainable.

I plan to attend a Getting to know your pension workshop to be sure I understand everything. The OP's wife may want to too. Its a big decision.


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## Jimmy (May 19, 2017)

I just did some back of napkin calculations in Excel to get what the PV of the payments are in the future and today. Assuming indexing to inflation the calcs aren't that hard as they stay the same in constant $. Then they get discounted bringing them back to present day $ w inflation.

For ex I calculated the PV first of the 1st series 15 yrs from now. Then brought it back to PV currently .I assumed a period to draw the pension to 85. Inflation from now to when she is 55, assumed 2%


First payments

$700 x 12 months for 10 yrs (55-65) = $84,000 PV in 15 yrs
PV today = PV (2%,15, 0, 84,000) = *$62, 413*

2nd series of Payments
$544/mo x 12 months x 20 yrs ( 65-85) = $130,560 PV in 25 yrs
PV today = PV(2%, 25,0, 130,560) = *$79,580*

Total PV

= 62,413 + 79,580

*= $141,993*

If I read your post correctly you are getting $80,000 + $35,000 = $115,000 in a lump sum. 

Lump Sum Comparison

For simplicity, assume you took the $115,000 and invested it for the same period of 45 years at 3%. Then we will bring that amount back at 2% inflation

So FV = (3%, 45,0, 115,000) = $ 434,883
PV = (2%, 45,0,434,883)

=* $ 178,387*



So the lump sum looks best if you can get a return of 3% or >


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## latebuyer (Nov 15, 2015)

I don't know why I post here since the OP has apparently gone awol but it has been interesting for me to delve deeper into my own municipal pension plan. If the OP wants some idea how the pension changes over time, I terminated my employment in 2006. At that time my pension was 260/month, now my estimated benefit is 323/month. I'm not sure if that is a good or bad increase in a bit over 20 years. In retrospect I should have taken the commuted value at the time, but what is done is done. I guess whether it is worth it going forward will depend on if the COLA continues as I still have 15-20 years to retirement.

Also, just clarifying the bridge benefit is in addition to your pension until 65 as it is supposed to bridge until you receive cpp. With the bridge benefit my pension is 495 until 65 then back down to 323 if I retire at 60.


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## Spudd (Oct 11, 2011)

My recommendation is to let your wife decide since it is her pension.


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## sags (May 15, 2010)

Accepting a commuted value payout usually means severing all ties with the company.

No health insurance, life insurance, discounts, or other ancillary benefits.


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## twa2w (Mar 5, 2016)

latebuyer said:


> I was just reviewing the Municipal pension plan information and it looks like you get your extended health subsidized too.
> https://mpp.pensionsbc.ca/extended-health-care-plan-premiums
> 
> It does say it is not guaranteed but perhaps the fact they won't have to subsidize people's msp benefits anymore will make it more sustainable.
> ...


Generally speaking, you only qualify for these if you retire from the job and take your pension. If you quit, before retirement age, and elect to defer your pension you are not usually entitled to any retirement benefits ( of course every employer is different so the OP will want to confirm this)


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## Timbyt (Mar 12, 2018)

*Thank you*

Thank you all for the informative responses. I'm glad that I didn't pay 1k to 2k for a financial planner and went for advice on this forum instead. I went AWOL because I've been really busy at work to get projects out (I'm in the HVAC/Plumbing Engineering business btw). I barely have time to see my wife and kid after 12 hrs of work the last 2 days. I hope to review all your comments more in depth and make a decision this weekend. I am sort of leaning towards the "defer" option because a few people mentioned on this and another forum that it may be hard to achieve the rate of return to beat the amount of money my wife would get if she chooses the defer option. Also with just 15 years to go before she can receive an early pension, we probably won't receive that much more money by investing ourselves. Again thank you very much for your knowledgeable responses, I truly appreciate it.


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## Retiredguy (Jul 24, 2013)

Bit of additional info:

· $700 monthly payment from age 55 to age 65
· $544 monthly payment from age 65 on

The age 55 $700 -amount has been reduced by 25%. 
If she defers to 60 the penalty is eliminated and becomes 933. 
At 65 the bridge dropout amount ($156)will not change so her age 65 amount would be 777.

Also when she starts the pension she can decide on various options such as 100% Joint Life meaning she will get a reduced amount but it will carry on to you should she die before you. There are a lot options available but by law she must include you for a 60% amount unless you sign off on it.

Let us know what she decides. Good Luck!


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## Retiredguy (Jul 24, 2013)

The subsidies are based on years of contributions and you need 10 yrs to get the full available subsidies. The subsidies have been reduced over the years and there are no subsidies for the spouse (Except MSP which is being eliminated) Dental was eliminated for the pensioner 2 years ago - I dropped from Dental entirely and self fund. Extended is still partially subsidised for me but not my spouse. The reason as I mentioned earlier is that the inflation account is under stress and the funding for benefits comes from that account, as by taxation law benefits cannot be paid out of the pension account. The remaining extended health plan has also been watered down considerably, such that I'm considering dropping out and self insuring.

There is no life insurance or other benefits.

All of which is to say that I don't think that these remaining benefit subsidies need weigh into the OP's wife's decision.


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## latebuyer (Nov 15, 2015)

Just wondering where you are getting the information that the inflation account is under stress. I thought according to the Municipal plan latest report and the actuarial report that the plan was doing quite well.


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## Eclectic12 (Oct 20, 2010)

Timbyt said:


> Thank you all for the informative responses. I'm glad that I didn't pay 1k to 2k for a financial planner and went for advice on this forum instead ...


You are welcome ... though not many are pros or plan participants that are commenting so due diligence is required.




Timbyt said:


> ... I went AWOL because I've been really busy at work to get projects out ... I barely have time to see my wife and kid after 12 hrs of work the last 2 days ... Also with just 15 years to go before she can receive an early pension, we probably won't receive that much more money by investing ourselves.


It up to your family as to what is important ... but it seems the two of you are likely busy where it looks like investing/right sizing the costs etc. would be a learning curve.
This may be another reason to go with the deferred pension.

There are lower effort/lower cost investing strategies but there is a minimum amount of learning, following up that would be required. 
Some examples would be the robo-advisors https://en.wikipedia.org/wiki/Robo-advisor or the coach potatoe strategy. http://canadiancouchpotato.com/model-portfolios-2/


Cheers


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## Retiredguy (Jul 24, 2013)

latebuyer said:


> Just wondering where you are getting the information that the inflation account is under stress. I thought according to the Municipal plan latest report and the actuarial report that the plan was doing quite well.


As reported by the Board of Directors of the Trust at the AGM/s and in their Quarterly news updates. 
The various benefits have been reduced/eliminated specifically because the inflation adjustment account is under stress. The I F account is funded by matching 1% employer/employee contributions and a portion of the employer's contributions pays for benefits (so its all not going into the IF account) and the increase in pensioners versus workers contributing is changing significantly. The Trustees have prioritized indexing and as such reduced benefits. Further they have put a cap on indexing of up to max 2.1% per year. This cap is reviewed every 3 years after the I F account is actuarially reviewed. Prior to the last review the cap was 1.95% (Neither indexing or benefits are guaranteed).

The pension account from which peoples pensions are paid is in very good shape as I indicated in an earlier post. Its last actuarial review showed it is 104%.... 

Each year the Board considers whether it is appropriate to grant pensions a indexing increase (based on the Canada Sept CPI) and if granted the amount of money required to fund the increase is taken out of the I F account and put into the pension account. Once in the pension account the increase becomes part of the guaranteed pension.

Here's a link to the 2016 Annual report
https://mpp.pensionsbc.ca/documents...l+Report/e918389d-36a5-45c8-b90a-824607ede4a8

Hope this helps explain.


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## latebuyer (Nov 15, 2015)

Thanks for that information. I'll have to start reading the annual reports to stay informed.


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## latebuyer (Nov 15, 2015)

Just confirming that I phoned the pension plan and the cola (pension adjustment amount) is applied to your deferred pension so it will go up slightly.


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