What Happens to Your Pension When You Leave a Job?

Losing or leaving a job is never easy. For many Canadians, it happens more than once over the course of their career. If you’re under 40, you may already have experienced it—or you might at some point in the future.

One of the most important questions that comes up after termination of employment is:

What should I do with my pension?

Even if your pension balance isn’t very large yet—perhaps below $50,000—it’s worth making an informed decision. The choice you make today can affect your retirement income decades down the road.

The good news? You have options. The “right” option depends on your personal circumstances, goals, and the level of flexibility you desire.

Let’s walk through the main choices available when you leave an employer pension plan.

Option 1: Keep Your Pension With Your Former Employer

Sometimes, the simplest move is no move at all.

If your employer offers a defined benefit (DB) pension plan and you’re not vested yet, leaving your contributions in the plan might be worthwhile. Over time, those funds will continue to earn interest. If you rejoin the same employer—or another company that participates in the same pension plan administrator—you may be able to add additional pensionable service to what you already have.

This is especially valuable if you’re early in your career. Once you’ve reached two years of service, you’ll be vested, which means you’ll qualify for lifetime pension payments as early as age 55.

In other words, if you think there’s a chance you’ll return to that employer or a related one, leaving your pension in place can keep the door open.

Option 2: Purchase an Annuity

An annuity is a financial product you buy with a lump sum. In exchange, the insurance company guarantees you a lifetime income (or for a specified period). Think of it as turning your pension into a personal, predictable paycheck.

This option can provide stability. If the annuity makes up a large portion of your retirement income, it may give you peace of mind knowing that you’ll never outlive those payments. It’s a foundation that remains stable regardless of the stock market.

On the other hand, if the annuity represents only a small slice of your overall retirement plan, you may prefer flexibility. Once you buy an annuity, the money is locked in—you can’t increase or decrease withdrawals for special projects like buying a home or starting a business.

In short: an annuity can be the right fit if security is your priority, but it’s less attractive if you want control and flexibility.

Option 3: Transfer to a Locked-In Retirement Account (LIRA) or Locked-In RRSP

Another common option is to take the commuted value of your pension—that is, the present-day value of the pension you’ve earned—and transfer it to a locked-in plan. This could be a LIRA or a locked-in RRSP, depending on your age and the rules governing your plan.

Here’s why people under 40 often find this option attractive:

• Investment control: You get to choose how your money is invested. You can work with an advisor to build a portfolio tailored to your goals.
• Tax-deferred growth: Just like an RRSP, your investments grow tax-sheltered until you’re required to withdraw (the year you turn 72).
• Flexibility later: Once you convert your LIRA into a retirement income fund, you can decide how much to withdraw each year—within set minimum and maximum limits. This can help you manage taxable income and even preserve eligibility for benefits like Old Age Security (OAS).
• Unlocking strategies: In some cases, you may be able to unlock a portion of your funds and move them to a regular RRSP or RRIF, which allows unrestricted withdrawals.

Of course, there are trade-offs. Unlike a defined pension or annuity, your retirement income from a LIRA depends on how your investments perform. If markets do well, your account could grow significantly. If they don’t, you’ll need to be comfortable with the risk.

Another consideration: if the Income Tax Act limits how much of your commuted value can be transferred to a locked-in plan, part of the payout may come to you as taxable cash. That may sound negative, but it can also be helpful: you might use it to pay down debt, cover a large expense, or re-contribute into an RRSP if you have available contribution room.

Option 4: Transfer to a New Employer Pension Plan

If your next job offers a pension, you may be able to transfer your vested pension funds into your new plan.

• If it’s a defined benefit (DB) plan, this often means “buying” years of service in the new plan.
• If it’s a defined contribution (DC) plan, your funds can usually move over without triggering tax.

This option works well if you want to consolidate all your information in one place. However, whether your new employer accepts the transfer—and how much they’ll take—depends on their plan rules. Always check with both pension administrators to confirm.

Option 5: Take a Taxable Withdrawal (If Allowed)

Not all registered pension plans (RPPs) allow this, and it’s usually only possible if your balance is relatively small. If the administrator does allow it, you can take your pension funds as a taxable cash payout.

💡 Be aware: the entire withdrawal will be added to your taxable income for that year. Depending on your tax bracket, that could create a hefty bill.Still, in some instances—for example, if you urgently need funds for debt repayment or a major life expense—it might be worth considering. Consistently review this with a financial advisor before making any decisions.

How to Evaluate Your Options

Choosing what to do with your pension is not a one-size-fits-all decision. Here are the main factors to weigh:

• Flexibility – Do you want the ability to control withdrawals and access lump sums, or do you prefer a predictable income?
• Security – Is it more important to you to have a guaranteed lifetime income, or are you comfortable managing investments and risk?
• Survivor benefits – How will your choice affect your spouse or beneficiaries if you pass away?
• Taxes – What are the short-term and long-term tax consequences of each option?
• Your career path – Do you plan to return to the same employer, or are you moving to another company with a strong pension plan?

A decision table or consultation with an advisor can help clarify these trade-offs.

Making Your Choice

At the end of the day, the best choice is the one that supports your personal goals—whether that’s security, flexibility, growth, or debt reduction.

It’s worth emphasizing: the choice is often irreversible. Once you’ve transferred funds or bought an annuity, you can’t go back. That’s why it’s so important to seek professional guidance.

A financial advisor or qualified tax professional can help you run the numbers, evaluate the tax impact, and design a retirement strategy that fits your circumstances.

Final Thoughts

If you’re under 40 and your pension balance isn’t huge yet, you might be tempted to cash out or make a quick decision. But even a relatively small amount today can grow into something significant by retirement.

Before you decide, take time to weigh your options carefully. Your future self will thank you.

Disclaimer: This article provides general information only. It is not intended as legal, tax, or financial advice. Please consult a qualified professional who can take your personal situation into account before acting on any of the information provided here.

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Mutual funds, approved exempt market products and/or exchange-traded funds are offered through Investia Financial Services Inc.

The comments contained herein are a general discussion of certain issues intended as general information only and should not be relied upon as tax or legal advice. Please obtain independent professional advice, in the context of your particular circumstances. 

This newsletter was prepared by Mukesh Patel,CFP who is a Investment Funds Advisor with Investia Financial Services Inc., and does not necessarily reflect the opinion of Investia Financial Services Inc. The information contained in this newsletter comes from sources we believe reliable, but we cannot guarantee its accuracy or reliability.