ARE employees choosing the right pension option at retirement?

There is no one-size-fits-all option upon retirement. Upon retirement, the accumulated funds in the member’s account are used to provide the individual with a monthly pension. Regardless of the pension option selected, the pension plans are designed to pay out the same amount of money. The retiree’s option should depend on the benefits that best suit him or her. Any option selected will provide an income for the pensioner’s lifetime. Based on my experience interacting with retirees, some have had regrets about selecting an option that wasn’t the best for them. At retirement, there was little or no guidance in selecting the option that will benefit their needs the most. As a financial advisor, I am concerned when retirees struggle in retirement because they were ignorant of what option was best suited for them and they have to find a way to live with an irrevocable decision. Financial coaching is necessary throughout all stages of life. Retirement planning is not about just contributing to a pension, and it doesn’t end the day you stop working. Only the pay cheques stop at retirement, but the bills will continue to come, and health-care costs will increase. Retirement planning is an ongoing process and should get easier for retirees in retirement if they stay on track in meeting their goals and ensure regular reviews, as they may need to make adjustments when living conditions or the environment change.

Recently, I interviewed a senior who is now at the normal retirement age and has applied for his pension. He wisely sought financial advice on how to proceed. I supported the option he selected as the option that best suited his needs. His request for advice was made on the basis that he received his retirement option form from his employers, but he needed professional advice to determine whether his preferred choice was the right fit for him. He knew that the decision he made will determine the lifestyle he enjoys in retirement and he could be in retirement for a very long time. Peace of mind is important for retirees. After working for so many years he wanted to ensure that his retirement years are leisurely and not stressful. He is planning ahead and understood that the decision he makes now will determine the peace of mind he enjoys in his latter years.

Let’s examine the thought process and plans of this retiree. Though he opted to receive his monthly pension, he has signed a contract with his employers to continue working in the capacity he had before retiring. Therefore, he will remain in the workforce while still receiving a pension. This pensioner is married and he wants to ensure that his wife is protected financially for as long as possible. The pension option he selects must meet this objective. Regarding the option which is “payable for his lifetime only — without a guaranteed period”, he had the choice of taking a lump-sum payout with a reduced monthly pension or foregoing the lump-sum payout and receiving a higher monthly pension. This option is known as “single lifetime”, which means that the pension is paid out for the lifetime of the pensioner only, and there is no payout to anyone after death. With the lump sum option, he could get more than $2 million dollars as a lump sum. He reasoned that a higher monthly pension would serve his retirement needs better. If he took the lump sum his monthly pension would be reduced by $20,000. He said that, should he take the lump sum option, he will be predisposed to spending rather than investing, and the lump sum would be depleted early. The decision was, therefore, made to forego the lump-sum payment. This indicates that it is our behaviour towards money and not the money itself that will determine our ultimate financial success. Understanding your behaviour towards money is important in making financial decisions. He was also of the view that if he invested $20,000 monthly from his monthly pension, then over time he will have more than the lump sum amount.

The superannuation scheme provided other options for this pensioner. These options are called “guaranteed options”. A guaranteed option provides for monthly pension payments to be made for as long as the pensioner is alive and gives a pension benefit to beneficiaries for a guaranteed or specific time upon the death of the pensioner. This means that if the pensioner outlives the guaranteed period, the pensioner will continue to receive a monthly pension for life. In the case mentioned above, the employee was given several guaranteed periods for retirement. The first guaranteed period provides a lifetime pension with a guarantee of five years. This means if the retiree dies within five years, monthly pension payments would be made to his beneficiary or beneficiaries until the five-year guaranteed period ends.

The next guaranteed period offered to the pensioner was a 10-year guaranteed option. Should the pensioner die within 10 years, his beneficiary/beneficiaries would receive monthly pension payments until the end of the 10-year guaranteed period. The last pension option offered was a 15-year guaranteed period. Again this option provides a lifetime pension to the pensioner. But in case he dies within the 15-year period the designated beneficiary or beneficiaries will continue to receive pension payouts until the 15-year guaranteed period ends. This pensioner selected the 15-year guaranteed period because he wanted his wife to benefit financially for the maximum time possible. The foregoing scenario shows that retirement planning doesn’t end when pension contribution stops. At retirement, retirees are at a crossroads. It’s important to read the signals well and understand where you want to go even before you get to the crossroads and armed with the financial knowledge of which road is best suited to get you to your destination safely. A competent and experienced financial advisor can assist.