five REASONS

… NOT TO CASH OUT YOUR PENSION PLAN

All pensions are deferred wages in one form or another. Although pension plans are available to all employees who are paid wages, salaries or who are self-employed, pension plan participation varies with the sector of the economy. It’s highest in the public sector where, as Statistics Canada data show, the recent participation rate was 84% of eligible employees. It is lowest in the private sector where participation of eligible persons was just 34%. Consider the value before you take money out of plans. Employment–based pension plans are actually a privilege worth paying for, explains Graeme Egan, a portfolio manager and financial planner with KCM Wealth Management Inc. in Vancouver. The cost is not so much money, for profitable pension plans return more than was put in. The real cost is illiquidity, for money in a plan cannot be spent. In spite of the red tape that getting money out of registered plans involves, there are good reasons to leave money in as long as possible or until there is no other good source from which to obtain funds. Here are five main reasons why:

1 Tax deferral If your pension is in the form of a defined-contribution plan or money you put into an RRSP, then you get a tax deduction for the present fiscal year. The deduction means you pay less tax. Employees usually get a refund if withholding was higher than tax payable. The sum refunded can go to paying down a mortgage or other loan. That reduction can save very substantial future interest costs in the life of the loan.

2 Maintaining employer matching Many defined-contribution company plans have employer matching. They range from a multiple, often twice what an employee contributes, to equal sums to 50% or less of employee contributions. It is hard to beat that by picking stocks or other investments.

3 Insured deposits Segregated funds within definedcontribution plans must return 80% to 100% of the investments (it varies with the fund chosen) if the planholder dies or, after 10 years, if the planholder is alive, then at least the initial amount, Mr. Egan adds.

4 Inflation protection Payouts in many defined-benefit plans, especially in the public sector, rise with increases in the consumer price index. That is becoming ever more rare in the private sector. If you’ve got indexation, then don’t sell out and lose it, Mr. Egan suggests. 5 Cost efficient management Employer-sponsored company plan management costs are as low as a tenth of a per cent of net asset value per year, occasionally even less. Those costs are hard to beat even with low-fee exchangetraded funds.