What is phased retirement for defined benefit pension plans?
Phased retirement is when a person receives a portion of their pension benefit from a defined benefit plan and continues to accrue pension benefits in the same pension plan.
Who is eligible for phased retirement?
The Income Tax Regulations set out the following eligibility criteria for a phased retirement benefit:
- age 55 or older where that person is entitled to an unreduced immediate pension under the terms of their defined benefit pension plan or
- age 60 or older where that person is entitled to a reduced immediate pension.
Current retirees receiving a pension are also able to return to work for their former employer and participate in a phased retirement arrangement.
The Canada Revenue Agency website contains additional information on phased retirement options:http://www.cra-arc.gc.ca/tx/rgstrd/rpp-rpa/fq-eng.html
Must phased retirement be made available to any member?
No. A pension plan is not required to offer the option of phased retirement to any members. It is the employer's decision whether to provide the option of phased retirement and it may be offered on a case-by-case basis on varying terms.
What does the employer need to do if they want to offer phased retirement?
Section 16.1 of the Pension Benefits Standards Act, 1985 sets out the circumstances under which a phased retirement benefit may be paid and other requirements that apply during the phased retirement period. Employers interested in offering phased retirement will need to ensure that the terms of their pension plans provide for the payment of phased retirement benefits. The plan administrator must also provide certain information to a person prior to them entering into a phased retirement agreement. See question 5 for more information on the disclosure requirements.
What are the disclosure requirements prior to entering into a phased retirement agreement?
Section 23.2 of the Pension Benefits Standards Regulations, 1985 (PBSR) states that the plan administrator must provide information to a person and their spouse or common-law partner before that person enters into an agreement with their employer regarding phased retirement. This required information is aimed to help the person make an informed choice about whether or not to enter into a phased retirement arrangement, as compared to their other options of continuing to work without receiving any pension benefit or fully retiring.
A current plan member considering phased retirement must be provided with a retirement statement and a statement containing information about the phased retirement benefit and information necessary to estimate the member's future pension at full retirement (i.e. after phased retirement). These statements must also be provided to the member's spouse or common-law partner.
A retiree returning to work must be provided with a statement containing information about the phased retirement benefit and information necessary to estimate their future pension at full retirement (i.e. after the phased retirement period). This statement must also be provided to the retiree's spouse or common-law partner. In addition, where the retiree is in receipt of a joint and survivor benefit, the consent of the spouse or common-law partner of the retiree to the cessation of that joint and survivor benefit must be obtained prior to the payment of a phased retirement benefit. The PBSR specifies the form and content for the consent.