HERE ARE FAC­TORS YOU NEED TO CON­SIDER BE­FORE TAK­ING AN EARLY RE­TIRE­MENT PACK­AGE

It may be a ter­rific op­por­tu­nity for some while risky for oth­ers, Ja­son Heath says.

Calgary Herald - - FINANCIAL POST -

The pan­demic lock­down and re­sult­ing re­ces­sion have led to a surge in vol­un­tary sev­er­ance of­fers for those ap­proach­ing re­tire­ment. As em­ploy­ees con­tem­plate their op­tions, there are four key con­sid­er­a­tions be­fore and af­ter sign­ing on the dot­ted line.

SEV­ER­ANCE TERMS

Ac­cept­ing an early re­tire­ment will re­sult in a vol­un­tary sev­er­ance pay­ment. The pay­ment is gen­er­ally based on a pre­de­ter­mined num­ber of weeks of salary paid for each year of an em­ployee’s ser­vice. For ex­am­ple, an em­ployee may be en­ti­tled to four weeks per year of ser­vice with a min­i­mum and max­i­mum num­ber of weeks of pay.

Sev­er­ance paid due to a vol­un­tary early re­tire­ment may be more gen­er­ous than an em­ployee might be en­ti­tled to if their po­si­tion was ter­mi­nated oth­er­wise. An em­ploy­ment lawyer can ad­vise as to what a rea­son­able en­ti­tle­ment might be for a spe­cific em­ployee and whether the sev­er­ance terms are ap­peal­ing.

A sev­er­ance may be paid in a lump sum or as a salary con­tin­u­ance over time. A sig­nif­i­cant lump sum pay­ment may cause an em­ployee to pay a sig­nif­i­cant amount of in­come tax when added to their other in­come for the year. Some­times there may be an op­tion to de­fer the sev­er­ance or a por­tion thereof to a fu­ture tax year, or have pay­ments made over sev­eral years. This may re­sult in less tax payable.

An em­ployee who re­ceives a lump-sum pay­ment may have only 30-per-cent tax with­held, as this is the re­quired with­hold­ing rate for pay­ments over $15,000. Given that top tax rates in sev­eral prov­inces ex­ceed 50 per cent, a re­cip­i­ent should bud­get for the in­cre­men­tal tax payable and con­sider tax re­duc­tion op­tions such as RRSP con­tri­bu­tions.

Salary con­tin­u­ance, whereby a salary con­tin­ues to be paid reg­u­larly over the du­ra­tion of the sev­er­ance pe­riod, can also re­sult in tax min­i­miza­tion.

Salary con­tin­u­ance may en­able on­go­ing pen­sion con­tri­bu­tions to in­crease a fu­ture pen­sion.

LOSS OF BEN­E­FITS

Salary con­tin­u­ance can also al­low an em­ployee to be cov­ered by an em­ployer’s group in­sur­ance ben­e­fits dur­ing the pay­ment pe­riod. Re­gard­less, the end of em­ploy­ment will gen­er­ally re­sult in the end of an em­ployee’s ben­e­fits cov­er­age at some point, un­less there is a re­tiree plan of­fered.

This is of­ten a con­cern for po­ten­tial re­tirees. Pri­vate health in­sur­ance poli­cies are an op­tion but so is self-in­sur­ing. A health plan is great for em­ploy­ees be­cause the cost is spread among sev­eral plan mem­bers and em­ploy­ers may cover some or all of the cost. In­vari­ably, some mem­bers will use the plan spar­ingly, and oth­ers will come out ahead.

When you are a mem­ber of a pri­vate plan and pay­ing your own pre­mi­ums, you may be less likely to re­ceive more re­im­burse­ments from the in­surer than you are pay­ing into the plan. In­sur­ance, by its very na­ture, re­quires more pre­mi­ums to be paid into the plan than are paid out. This, cou­pled with the max­i­mum an­nual cov­er­age lim­its, may cause some re­tirees to con­sider sim­ply pay­ing for their health-care costs them­selves and for­go­ing cov­er­age. There is also govern­ment cov­er­age for se­niors for pre­scrip­tion drugs that varies by prov­ince.

COM­PANY PEN­SION AND SAV­INGS PLANS

Em­ploy­ees who have a pen­sion plan at work may have a sig­nif­i­cant de­ci­sion to make upon leav­ing their em­ployer.

De­fined ben­e­fit (DB) pen­sion plans pay a monthly ben­e­fit to a pen­sioner. Pay­ments can gen­er­ally be­gin be­tween age 55 and 65. Be­yond choos­ing when to start a pen­sion, there may be pay­ment op­tions as well. These op­tions could in­clude survivor op­tions for a spouse upon a pen­sioner’s death, a guar­an­tee pe­riod for pay­ments if a pen­sioner dies at a young age, or other po­ten­tial elec­tions.

The higher the guar­an­tee pe­riod or per­cent­age of a pen­sion that is payable to a sur­viv­ing spouse, the lower the monthly pen­sion pay­ments to the re­cip­i­ent. Some rea­sons to con­sider higher guar­an­tees and survivor op­tions are a pen­sioner hav­ing a short­ened life ex­pectancy, a younger spouse, or a spouse with­out a pen­sion of their own.

Some re­tirees may be able to elect to take a lump sum com­muted-value pay­ment to forgo their fu­ture DB pen­sion pay­ments. Some or all of this pay­ment will be eli­gi­ble for a tax de­ferred trans­fer to a locked-in re­tire­ment ac­count, but some may be sub­ject to tax­a­tion in their year of the pay­ment.

Com­muted value pay­outs are not avail­able to all pen­sion­ers, and the de­ci­sion to forgo a guar­an­teed monthly pen­sion can be a sub­stan­tial one. Some rea­sons to con­sider a com­muted value are hav­ing a short­ened life ex­pectancy, hav­ing an­other DB pen­sion plan, hav­ing a spouse with a DB pen­sion plan, or hav­ing a high investment risk tol­er­ance.

Em­ploy­ees with de­fined con­tri­bu­tion (DC) pen­sion plans may be able to trans­fer their plan to a locked in re­tire­ment ac­count at an­other fi­nan­cial in­sti­tu­tion or leave the plan in place with the cur­rent provider. Fees for re­tiree investment op­tions may be com­pet­i­tive com­pared to ex­ter­nal op­tions.

RE­TIRE­MENT PLAN­NING

For those who are ready to re­tire, one chal­lenge is de­ter­min­ing the tim­ing of pen­sions. In ad­di­tion to DB and DC pen­sions that can be started im­me­di­ately or de­layed, there are govern­ment pen­sion op­tions to con­sider as well.

A re­tiree who is 60 or older has the op­tion of be­gin­ning one or both fed­eral govern­ment pen­sion plans. Canada Pen­sion Plan (CPP) re­tire­ment pen­sion can start as early as age 60 or as late as age 70. Old Age Se­cu­rity (OAS) can start as early as 65 or as late as age 70. The later a re­cip­i­ent be­gins their pen­sion, the higher the monthly pay­ments.

Both pen­sions have nu­ances. CPP, for ex­am­ple, has a survivor ben­e­fit po­ten­tially payable to a spouse. OAS has a claw­back or re­pay­ment of ben­e­fits if a re­cip­i­ent’s in­come ex­ceeds $79,054 in 2020.

For those who are not sure if they can af­ford to re­tire, it can make a vol­un­tary sev­er­ance pack­age that much riskier. De­spite the at­trac­tive terms, if an em­ployee is not yet fi­nan­cially in­de­pen­dent, or un­able to eas­ily re­place their in­come while they con­tinue to work, an early re­tire­ment may risk a re­duc­tion in their re­tire­ment life­style. Re­tire­ment plan­ning should in­clude a thor­ough as­sess­ment of all re­tire­ment in­come sources and ex­penses, as well any re­main­ing debt or planned as­set sales, like home down­siz­ing plans.

The psy­cho­log­i­cal and emo­tional im­pact of re­tire­ment should also be con­sid­ered. Whether some­one likes their job or not, re­tire­ment may re­sult in a loss of pur­pose or friend­ships, and some re­tirees will find it eas­ier than oth­ers to fill 40 hours a week with other things. The non-fi­nan­cial as­pects of re­tire­ment plan­ning may be al­most as im­por­tant as the fi­nan­cial con­sid­er­a­tions.

There are sev­eral fac­tors to be con­sid­ered be­fore ac­cept­ing an early re­tire­ment pack­age and upon re­tir­ing. The sev­er­ance terms, the loss of ben­e­fits, the pen­sion op­tions, and re­tire­ment plan­ning are just some of them. It may be a fan­tas­tic op­por­tu­nity for some em­ploy­ees, while for oth­ers, there can be risks. Fi­nan­cial Post

Ja­son Heath is a fee-only, ad­vice-only Cer­ti­fied Fi­nan­cial Plan­ner (CFP) at Ob­jec­tive Fi­nan­cial Part­ners

Inc. in Toronto. He does not sell any fi­nan­cial prod­ucts what­so­ever.

GETTY IMAGES FILES

De­spite the at­trac­tive terms of a vol­un­tary sev­er­ance pack­age, it poses risks if an em­ployee is not yet fi­nan­cially in­de­pen­dent, or un­able to eas­ily re­place their in­come, says Ja­son Heath. For those who are ready to re­tire, he notes that de­ter­min­ing the tim­ing of pen­sions is a chal­lenge.

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