Cash payments (refunds) under a defined-benefit pension plan
In some situations, a member is entitled to a cash payment (refund). A
defined benefit plan must provide for certain payments. Others may be offered as options.
A plan
must provide cash payments for the following situations:
Situations in which the plan
may provide for a refund:
A plan also offers different
types of pensions.
How to obtain a cash payment (refund)
Generally, to obtain a cash payment (refund), a member must make an application to the plan administrator. All refunds are taxable. However, it is possible to defer taxation if the amounts can be deposited directly in an
RRSP or a registered retirement income fund (RRIF).
Unless otherwise indicated, a member is entitled to a refund at any time, even if he or she does not have a transfer right, if all the required conditions
Phased retirement: to reduce the number of hours worked before retirement (early benefit)
An active member who is 10 years or less away from the normal retirement age (for example, at least 55 if the normal retirement age is 65) and who reaches an agreement with his or her employer to reduce the number of hours worked, can receive a payment under the pension plan to offset the reduction in employment earnings.
The member can decide how much he or she wants to receive under the plan, but it cannot be more than the smallest of the following amounts:
- 70% of the reduction in employment earnings resulting from a reduction in the number of hours worked
- 40% of the maximum pensionable earnings (MPE) under the Québec Pension Plan for the year in question ($27 400 in
2024)
- the value of the member's benefits under the plan
The payment must be made in a lump sum for the entire year, on the date chosen by the member. If work hours are reduced during a period lasting more than one year, the member can receive more than one payment, but not more than one in any single year.
The payment received is an advance on retirement savings. Thus, the member's benefits in the plan will be reduced by an amount corresponding to the payment received. Furthermore, since he or she will still be an active member of the plan, new benefits will accumulate during the period in question.
The employer is not required to agree to a reduction in the member's work hours. If the employer refuses, the worker cannot take phased retirement.
A worker is not required to retire at the end of the period of phased retirement, unless the agreement with the employer requires it.
There is no minimum percentage of reduction in work hours to be eligible for phased retirement.
A helpful example...
Caroline is 56 years old and earns $50 000 a year. She reaches an agreement with her employer to reduce the number of hours worked by 45%. As a result, her employment earnings will be reduced by $22 500, leaving her with an annual salary of $27 500. The amount credited to her account is $250 000.
In 2024, she is entitled to a maximum payment of $15 750 from the pension plan.
In other words, $15 750, which is 70% of the reduction in earnings, is less than 40% of the MPE in 2024, which is $27 400. That is also less than the balance of her account.
Her income in 2024 could be as much as $43 250 ($27 500 + $15 750).
Note that...
There is
another phased retirement measure; it can give entitlement to a cash payment. A member cannot benefit from both measures simultaneously.
Advance on retirement savings under the plan (between ages 55 and 65)
A member can obtain an advance on his or her retirement income by opting for a lump-sum payment if he or she is:
- between the ages of 55 and 65
- entitled to a pension under the plan, because, for example, active membership has ceased
- does not want to begin receiving a pension right away
The maximum annual advance
The maximum advance cannot exceed 40% of the maximum pensionable earnings (MPE) under the Québec Pension Plan in the year in which payment of the pension begins less the amount of any temporary pension from another pension plan, annuity contract or life income fund (LIF). In
2024, the advance cannot exceed $27 400.
A helpful example...
Suppose a member's active membership ceases and he or she is entitled to a deferred pension of 1 000 $ a month, payable at age 65. At age 58, he or she requests and obtains an advance of 10 000 $. At age 65, he or she will be entitled to a pension of around 885 $* a month.
* This amount is for illustrative purposes. The actual amount would be based on several factors, such as interest assumptions, the member's sex and age and the date of the valuation.
Value of benefits is less than 20% maximum pensionable earnings under the Québec Pension Plan ($13 700 in
2024)
A member is entitled to a refund of the value of his or her benefits if, at the time active membership ceases, that value is less than 20% of the maximum pensionable earnings (MPE) under the Québec Pension Plan, that is, $13 700 in
2024. However, the member must not already be receiving a retirement pension under the plan.
For this refund, no consideration is given to additional voluntary contributions and amounts transferred from one plan to another that have not been converted into a retirement pension, which are subject to other conditions.
A member can ask for a refund of additional voluntary contributions at the following times:
- within 90 days following receipt of a statement of cessation of active membership, if the member is more than 10 years away from the normal retirement age under the plan (for example, under 55 and the normal retirement age is 65)
- thereafter, once every 5 years, within 90 days following the anniversary of the date on which active membership ceased.
The plan can, however, have provisions that allow a member to receive a refund at other times.
Refund imposed by the plan administrator
In this case, the plan administrator can decide to make a refund even if the member has not asked for one. The administrator will inform the member of the decision and the member will have 30 days to indicate how payment of his or her benefits is to be made (for example, by transferring the refund to an
RRSP or by a direct, cash payment). If the member does not give payments instructions, the administrator will decide how to make the payment (for example, by a direct, cash payment). The notice must mention such a possibility.
Non-residency in Canada
Regardless of the total value of the member's benefits under the plan, and even if the member has already started receiving a retirement pension under the plan, he or she can receive a refund of the value of his or her benefits or a refund representing the value of the future pension payments. The member must meet all 3 of the following conditions:
- has not lived in Canada for at least 2 years
- active plan membership has ceased
- no longer works for the employer who sponsors the plan.
Benefits exceeding the amount that can be transferred tax free
If the member asks for a transfer of his or her benefits and the plan administrator is aware that a portion of those benefits are in excess of the amount that can be transferred tax free, the administrator must refund the excess to the member.
In this case, the refund cannot be transferred directly to an
RRSP for tax deferral purposes.
Additional voluntary contributions
A member's additional voluntary contributions (if any) can be refunded if both of the following conditions are met:
- active plan membership has ceased
- the additional voluntary contributions have not already been converted into an additional pension.
A member can ask for a refund of additional voluntary contributions at the following times:
- within 90 days following receipt of a statement of cessation of active membership, if the member is more than 10 years away from the normal retirement age under the plan (for example, under 55 and the normal retirement age is 65)
- thereafter, once every 5 years, within 90 days following the anniversary of the date on which active membership ceased.
The plan can, however, have provisions that allow a member to receive a refund at other times.
Sums transferred from a previous plan
A member can receive a refund of sums transferred from a previous plan if all 3 of the following conditions are met:
- active membership in the plan has ceased
- the sums in question could have been refunded under the rules of the plan from which they came
- the provisions of the plan allow such refunds
Disability that reduces life expectancy
A member can obtain a refund of the value of his or her benefits under the plan, in one or several payments, if the following 4 conditions are met:
- he or she has a physical or mental disability
- the disability reduces life expectancy
- he or she is already entitled to a pension under the plan (for example, active membership has ceased)
- the plan's provisions allows such a refund.
Note that...
Disability can also give entitlement to a
pension.
Deferred pension with little or no indexation
The member may be entitled to an additional benefit if:
- membership ends before the member is 10 years away from the normal retirement age (for example, if under age 55 and the normal retirement age is 65)
- there is little or no indexation of the pension between the time the member leaves the plan and the time when he or she is 10 years away from the normal retirement age
In these circumstances, the member can receive a cash payment that corresponds in whole or in part to the value of the benefit, if your plan so provides.
Other useful information