FP Answers: What is a pension bridge and should I take it?

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By Julie Cazzin with Allan Norman

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Q: I’m retiring next year at the age of 59 and I have a defined benefit (DB) pension plan with my employer, so I have a few decisions to make before I begin. What is a pension bridging benefit in a DB plan? Should I choose this option or not? I also need to decide what percentage of my pension’s survivor’s benefit will be paid to my spouse Richard in the event of his death. There are multiple possibilities. Richard has no employer pension but has about $250,000 in his Registered Retirement Plan (RRSP) and plans to retire later than me – in four years when he turns 65. He has worked part-time for the past 10 years and earns around $40,000 annually. What other options should I look out for? I don’t want to make a mistake. – Rinalda

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FP responses: Rinalda, I can understand your confusion and concern regarding bridging pension and survivor benefit decisions. These are decisions that will have a profound impact on your and your husband’s lifestyle, taxes, and potential government benefits. With a quick overview of the basics, you can decide which options work best for you.

All DB pension plans have a lifetime annuity that may or may not be adjusted for inflation. In addition, some plans offer bridging benefits, which is additional retirement income paid from the time you retire until you turn 65. At this point, the bridging service ends.

Other plans, like yours, allow the bridging pension to be counted towards a lifetime pension, so that before the age of 65 there is a lower total pension and after the age of 65 a slightly higher pension is paid.

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The bridging benefit is intended to replace the Canada Pension Plan (CPP) until it is drawn at the standard retirement age of 65. However, this does not mean that you cannot start your CPP at age 60 and receive both if starting CPP earlier makes sense in your situation.

Although the Bridging Benefit is designed as a CPP replacement, it is usually less than your CPP, so your total income at age 65 is likely to increase as the Bridging Benefit falls and you start CPP and Old-Age Insurance (OAS).

When deciding whether to take the higher bridging benefit before the age of 65 or include it in your life annuity, consider your desired lifestyle and your financial requirements in old age. Will you spend a steady income or will you tend to spend more when you are young, healthy and productive?

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If you’re thinking about adding your bridging benefit to your life annuity, can you afford the lifestyle you want through 65 without stretching your investments or having to start CPP early? If not, consider increasing the Greater Bridging Perk to 65.

When it comes to survivor benefits, think of insurance. If your husband dies, what income will he need? Remember that on your death your OAS will stop and part of your CPP will transfer to your husband if he is not already receiving the maximum CPP for one person, however he will no longer be able to split the retirement income and he will may find that his spending is not going down.

Most pension plans provide a survivor’s pension equal to two-thirds of your non-bridging annuity. In your case, you have additional options such as a 50 percent survivor’s pension or no reduction in your pension.

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Your lifetime pension will be reduced if a survivor’s benefit is chosen. The higher the survivor’s benefit, the greater the reduction in your pension.

Your husband can opt out and agree not to receive survivor benefits and if he did, you would receive a higher lifetime pension. Keeping survivor benefits in place is best for most people. Reasons for a waiver can be, among other things, if your husband has a reduced life expectancy, a good pension or more than enough money.

What makes this a difficult decision is not knowing our life expectancy. If you knew that your husband would die, you would forego survivor benefits. If you lived a shorter life than the actuaries predict, you wouldn’t count your bridging benefit against your lifetime annuity.

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We don’t know when we’re going to die, so base your decision about bridging benefits on your living needs and think about insurance when choosing survivor benefits.

Allan Norman, through Atlantis Financial Inc., provides certified financial planning services for a fee only. Allan Norman is also registered as an investment advisor with Aligned Capital Partners Inc. He can be reached at www.atlantisfinancial.ca or [email protected]

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