There's often more to leaving a job than a last pay stub or T4 slip!

In some cases, employees who leave a company must also decide what to do about the employer-sponsored pension plan they were contributing to, whether it be a defined contribution plan or a defined benefit plan. Job mobility, to some extent, calls for financial gymnastics.

Defined Contribution Pension Plans

Under a defined contribution pension plan, the employer (and occasionally the employee) contributes to the employee's retirement account. At retirement, the employee withdraws the balance in the form of a guaranteed annuity or a life income fund (LIF).

Employees have two options when they stop working. They can let the funds or value accumulate in their account in their employer's pension fund or transfer them to a locked-in retirement account (LIRA), an LIF or, if available, the new employer's pension plan. They can also opt for a guaranteed annuity.

What would the best choice be for these employees? There's more than one good answer to this question. Some things to consider are the potential return, management fees and the risks associated with each available option. An employee can choose to manage the entire amount transferred into a LIRA or n LIF, or ask a financial advisor for advice.

Defined Benefit Plans

Under a defined benefit plan, employees know in advance what the amount of their annuity will be at retirement (e.g.: a percentage of their salary). This is calculated according to their years of service. Sometimes, only the employer contributes to this type of plan. If the employee also contributes, the amounts may vary from year to year depending on the terms of the plan. This type of plan is more complicated for the employer to administer than a defined contribution plan.

When participants stop working, most defined benefit plans offer an alternative; either to receive an annuity from their current plan or transfer the value. Such a transfer will be made to a LIRA or an LIF or, if possible, to their new employer's plan. Generally, this type of transfer is not possible unless the employee has reached the required age to be entitled to early retirement under the plan.

A defined benefits plan provides a guaranteed annuity at retirement, which represents an interesting advantage for employees. However, transferring the value of the annuity to a LIRA or an LIF will enable them to contribute more to an individual RRSP for the years during which they were paying into a supplemental pension plan. Because of the particular provisions of defined benefit pension plans, this type of transfer may have tax advantages.

Once again, one choice isn't necessarily better than another. Employees must evaluate several factors, including their risk tolerance and the management fees involved in each option, before making a decision.

Public Plans

One final point is that leaving a job has little impact on benefits payable from public pension plans. For example, people age 65 could receive the maximum payable benefits to which they are entitled from the Old Age Security Program, regardless of the number of jobs held while in the job market.