When a plan member retires (whether early from age 55 onwards or at normal retirement age of 65), they have two main options. They can require the plan administrator to pay an amount equal to the account balance (for defined contributions plans) or commuted value of the member’s benefits (for defined benefit plans) to:
- to a prescribed retirement product; or
- for the purchase for the member of a life annuity that starts on a date not earlier than the earliest date the member would have been entitled to receive payment of pension benefits under the plan.
A prescribed retirement product is a retirement plan approved by the Commission such as a local retirement product, which enables a retiree to continue to invest their pension funds and receive regular monthly pension payments from the plan administrator. Upon the death of the retiree, the remaining value of their pension fund account balance is paid to their named (in writing) beneficiary. If no beneficiary is named, then the amount is paid to the estate of the deceased retiree.
The amount of monthly pension received is based upon the value of the pension fund account balance and in accordance with the following percentage drawdown:
|55 to 64
|65 to 69
|70 to 80
|$10,000 or 25% whichever is greater
In this retirement option, the retiree bears the responsibility for investing the assets in their pension fund. If their pension fund balance goes to zero, as a result of previous drawdowns and/or adverse investment returns, the pension benefit stops.
Members are required to advise the administrator of the option they have chosen in writing within ninety days from their date of termination. If a member does not deliver the written direction mentioned above, the administrator will place the value of their account balance or benefit in the most conservative investment option they offer.
The other retirement option is a life annuity. In general terms an annuity is a financial product issued usually by an insurance company that normally provides a predetermined and guaranteed payout over the term of the annuity until the death of the annuity owner (called an “annuitant”). Annuities can also provide a survivorship feature so that if an annuitant dies, their spouse can continue to receive a benefit.
In this retirement option, the issuer (e.g. insurance company) bears the responsibility for investing the assets and making the payment to the retiree. Thus, they take on the investment risk. However, should the issuer go out of business, then the retiree may not continue to receive a pension benefit.
When a plan member in a defined benefit pension plan retires (whether early or at normal retirement age of 65) and they decide not to transfer their commuted value of their benefit out of their employer plan, they receive a fixed monthly pension benefit (which is normally calculated based on their final salary and years of service) directly from their pension plan. Many such plans also provide for a survivorship benefit to a spouse or other beneficiary upon the death of the retiree.
In this retirement option, the employer bears the responsibility for ensuring the assets are invested and providing sufficient funding to ensure the pension payments are made. Thus, the employer takes on the investment and funding risk. However, should the employer go out of business, and the plan is not fully funded, then the retiree may not continue to receive the same amount of their pension benefit and the plan could be closed.