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By Julie Cazzin with Allan Norman
Q: I’m retiring next year at age 59 and have a defined-benefit (DB) pension plan with my employer, so I will need to make some choices before starting it. What is a pension bridge benefit in a DB plan? Should I take or forego this option? I also need to decide on the percentage of the survivor benefit of my pension that will be payable to my spouse, Richard, upon death. There are several options. Richard doesn’t have an employer pension, but has roughly $250,000 in his registered retirement savings plan (RRSP) and plans to retire later than me — in four years when he reaches age 65. He has worked part time for the past 10 years and earns roughly $40,000 annually. What other options should I pay attention to? I don’t want to make a mistake. — Rinalda
FP Answers: Rinalda, I can understand your confusion and concerns around decisions about pension bridging and survivor benefits. These are decisions that will have lasting impacts on you and your husband’s lifestyles, taxes and possible government benefits. With a quick review of the basics, you’ll be able to decide which options are best for you.
All DB pension plans have a lifetime pension that may or may not be indexed to inflation. In addition, some plans offer bridging benefits, which is additional pension income paid from the time you retire until you turn age 65, at which time the bridge benefit stops.
Other plans, such as yours, allow a blending of the bridge benefit into the lifetime pension, so a smaller total pension is received before age 65 and a slightly larger pension after age 65.
The bridging benefit is intended as a Canada Pension Plan (CPP) substitute until taken at the normal retirement age of 65. Although, this doesn’t mean you can’t start your CPP at age 60 and collect both if starting CPP early makes sense in your situation.
Even though the bridge benefit is designed as a CPP substitution, it’s normally less than what your CPP would be, so your total income at age 65 will likely increase when the bridging drops off and you start CPP and Old Age Security (OAS).
In deciding if you should take the larger bridging benefit before age 65 or blend it into your lifetime pension, think about your desired lifestyle and financial requirements throughout retirement. Will you spend a steady income or are you more likely to spend more when you are young, healthy and able?
If you’re thinking of blending your bridge benefit into your lifetime pension, will you be able to afford your desired lifestyle between now and 65 without having to heavily draw on your investments or starting CPP early? If not, consider taking the larger bridge benefit to 65.
When it comes to survivor benefits, think insurance. If you predecease your husband, what income will he need? Keep in mind that when you die, your OAS will stop and some of your CPP will transfer to your husband if he is not already getting the maximum CPP for an individual, but he will no longer be able to split pension income and he may find that his expenses don’t drop.
Most pension plans provide a survivor benefit worth two-thirds of your lifetime pension, not including the bridge benefit. In your case, you have additional options such as a 50-per-cent survivor benefit or no reduction in your pension.
Your lifetime pension will be reduced when a survivor benefit is selected. The greater the survivor benefit, the greater the reduction in your pension.
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Your husband can sign off and agree not to receive survivor benefits, and if he did, you would receive a larger lifetime pension. For most people, it is best to maintain survivor benefits. The reasons why you may consider waiving them include if your husband has a shortened life expectancy, a good pension or more than enough money.
What makes this a tough decision is not knowing our life expectancies. If you knew your husband was going to predecease you, then you would waive survivor benefits. If you were going to live a shorter life than what the actuaries predict, then you wouldn’t blend your bridge benefit into your lifetime pension.
We don’t know when we are going to die, so base your bridging benefit decision on your lifetime lifestyle needs and think insurance when deciding on survivor benefits.
Allan Norman provides fee only certified financial planning services through Atlantis Financial Inc. Allan is also registered as an investment advisor with Aligned Capital Partners Inc. He can be reached at www.atlantisfinancial.ca or firstname.lastname@example.org
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