Cashing out a pension may not be prudent
The pros and cons of cashing out a pension plan and an unexpected complication from a payroll stock-buying plan were among the topics raised in the latest batch of reader letters. Here’s what they wanted to know.
Q “I am in my early 60s and set to retire at the end of this year and I have a tough decision. I can take all my pension money out and put it elsewhere, or leave it with my company and collect a monthly pension. In the event of my death, my husband would receive 60 per cent (of the monthly pension payment) until his death. There would be no residual asset for our children. That payment also would push him into a higher tax bracket, potentially triggering the federal clawback (of Old Age Security). What do you advise?”
A Caroline Nalbantoglu of CNal Financial Planning said the advisable course of action hinges on the reader’s priorities. No decision should be made solely for tax reasons, she said. In this particular case, withdrawing the pension amount may seem attractive, but brings with it responsibility for managing the funds or finding an adviser to do so. “It means assuming the market risk for her pension fund and forgoing the guarantees,” she noted. Longevity risk is another consideration. The couple could outlive her savings. “Having a guaranteed income stream from a defined-benefit pension plan is usually worth its weight in gold. There aren’t too many of those around anymore,” Nalbantoglu said. “I would recommend that the reader take the risk of living past age 71 (when the pension gets transferred into a locked-in life income fund) and take the monthly pension. If she wants to leave an estate for her children, she can take more risk with other investments and build a portfolio accordingly.”
Q “I still own shares of a company I used to work for, but the division that employed me closed years ago. The stock was paid for on a company payroll plan over a period of years. I’ve tried to find out what my average cost was, but nobody seems to have that information on file. How do I handle this for tax purposes when I decide to cash out?”
A Canada Revenue Agency says it’s up to the taxpayer to keep track of this sort of information. If you don’t have it, an approximation will do on the capitalgains paperwork when you sell the shares, but you may have to explain and justify your numbers to the tax authorities. Studying the price history of the stock during the period you were buying it under the payroll plan should allow you to come up with a reasonable estimate of your acquisition cost, although it may need further tweaking if dividends were reinvested over a period of years.