2012 has been a busy year. Between the new mortgage rules in July 2012 and the announcement of an increase in the annual TFSA contribution limit by $500, a lot has happened. If you’re a pension plan member in who is employed in Ontario, there are some important changes that took place July 1, 2012 that you ought to be aware of.
Similar to neighbouring provinces Manitoba and Quebec, effective July 1, 2012 Ontario members are now immediately vested. What does vesting mean? Simply put, vesting means you are entitled to the full value of your accrued pension. If you leave your employer after July 1, 2012, you are entitled to your pension benefits.
Why this is important? Prior to July 1, 2012, Ontario members had to wait two years to be vested – if you left your employer prior to your vesting date (two years of membership) you would have received no benefit at all (only your contributions with interest).
As you can see the new vesting rules are of great benefit to employees – you can now leave your current employer prior to two years and still have a pension entitlement. It’s important to note that employers can still make it mandatory for members to wait two years to join their pension plan – you would only be immediately vested once you join (if you left prior to joining you wouldn’t be entitled to any benefit).
Unlocking of Small Benefit
If you’ve been a member of your employer’s pension plan for many years and leave prior to your early retirement date, you’ll have the choice of the commuted value or a deferred pension. Some members’ commuted values can be quite substantial if they’ve been with their employer for many years; unfortunately, the funds are likely locked-in until retirement age.
So how do the new rules affect Ontario members? The small benefit threshold has been increased effective July 1, 2012. You can now receive up to 20 per cent of the Year”s Maximum Pensionable Earnings (YMPE) (2012 YMPE: $50,100 x 20% = $10,020) or up to four per cent of the YMPE of your annual benefit payable at your normal retirement date in cash or transferred directly to your RRSP.
This has been increased from two per cent of the YMPE of your annual benefit payable at your normal retirement date. Again, if you’re considering leaving your employer prior to retirement, you may have access to funds that would have been otherwise locked-in to retirement.
Ontario defined benefit pension plan members who left their employer prior to retirement and elected a deferred pension were at a disadvantage before July 1, 2012. Pension plans members who stayed with their employer until retirement may receive “grow-in benefits,” such as unreduced early retirement, while former members with deferred pensions would have their pension reduced at the normal rate.
Members electing a deferred pension after July 1, 2012 are now entitled to grow-in benefits if they meet the rule of 55 – your years of continuous service (the number of years from your date of employment to your date of termination) and your age must equal at least 55 points.
As you can see the new pension rules have a profound effect on members employed in Ontario. If you’re considering leaving your employer it’s important to understand your pension entitlement – leaving even a month too early could cost you your pension entitlement. Were you aware of the new pension plan changes? How do these rules affect you?
If you’d like to read about the Ontario pension plan changes in greater detail, visit the FSCO website .
About the Author: Sean Cooper is a single, 20-something year old, first time home buyer located in Toronto. He has experience in the financial sector as a Pension Analyst, RESP administrator and Income Tax Preparer. He holds a Bachelor of Commerce in business management from Ryerson University. You can read some of his other articles here.