As you approach the later years of life, it is important to meet with a lawyer to have a Will drafted so you know exactly what is going to happen to your assets when you pass away. One issue that should be canvassed during this meeting is your Ontario Pension plan beneficiary designation.
For many individuals contributing to an Ontario employment pension plan, their pension forms their largest asset. However, it is surprising how many individuals die without having ensured that the person they want to inherit their benefits receives those benefits. This is particularly true in cases where the person has separated and/or re-partnered. The rules are also different if you die before or after retirement.
Who Gets Your Ontario Pension When You Die?
Who can inherit your pension survivor benefit, or your pre-death retirement benefit, is regulated by the Ontario Pensions Benefits Act and you need to be informed what impact this could have on your estate plans.
Some examples of pension plans in Ontario include:
- Healthcare of Ontario Pension Plan (“HOOPP”);
- Ontario Power Generation (“OPG”);
- Ontario Municipal Employees Retirement System (“OMERS”);
- Ontario Teachers’ Pension Plan (“OTPP”); and
- Public Service Pension Plan (“PSPP”).
Joint and Survivor Pension Benefit
If you have an “eligible spouse” on the date of your first pension payment, your pension plan automatically becomes a Joint and Survivor pension; that is, upon your death, your surviving “eligible” spouse will inherit the remainder of your pension. An “eligible spouse” is defined as either a legally married spouse with whom you reside or a partner with whom you have been residing for at least 3 years (i.e. a common-law spouse). The purpose of the “living with the spouse” requirement is so that spouses who are separated on the date of retirement, but not yet divorced, do not automatically receive the other spouse’s pension benefits upon their death.
It is important to note that unless your spouse decides to waive their right to receive your pension upon your death (Ontario pension plans provide a specific form for this purpose), your spouse will automatically receive your pension. Even if you have named an alternative beneficiary, if your spouse has not signed the waiver form, they are automatically your beneficiary. So, if you have a new “eligible spouse”, but have named your adult children as your pension beneficiaries, if your spouse has not signed the waiver, then your spouse inherits, not your children.
When a Joint and Survivor pension benefit exists under the PBA, your “eligible spouse” will receive the survivor pension that will be paid upon your death. The surviving spouse can collect this as a lump sum payment if the pension remaining is relatively small, otherwise they will receive periodic pension payments.
Upon the death of your surviving spouse, any remainder of the Joint and Survivor pension is paid out to the designated beneficiaries, if any. In the case of children, there may also be age and education requirements, so it is important to look for these and plan accordingly.
If you have no eligible spouse upon your death, the survivor pension is paid immediately to your designated beneficiaries. If you have no named beneficiaries, then the residue of the pension is paid to your estate.
Pre-Retirement Death Benefits
If a pension plan member dies before they retire, then the entirety of the pension goes to that person’s spouse, if eligible. Eligibility requirements for pre-retirement benefits follow the same rules as for post-retirement benefits, so your spouse needs to sign a waiver if you want someone else to receive your death benefit.
Unlike with Joint and Survivor pension plans, the payment of pre-retirement death benefits can be collected in one of three ways: (1) a lump sum payment equal to the commuted value of the deferred pension; (2) an amount equal to the commuted value of the deferred pension into an RRSP; or (3) an immediate or deferred pension, the commuted value of which is at least equal to the commuted value of the deferred pension. The “commuted value” in this context simply means the present-day value of the entirety of the remaining pension funds.
Outside of these administrative details that differentiate a Joint and Survivor pension plan from pre-retirement death benefits, the rest remains largely the same. This includes entitlement priority as it relates to spouses and beneficiary designations.
Cautionary Tale
It is unfortunate but true that this process, although meant to shield future pensioners, sets a date for spouses that may wish to abuse their potential entitlement. In the Joint and Survivor’s pension benefits provisions, the only requirement is that the spouse must be living with the pensioner on the day of the first instalment of the pension, or on the date of the death of the member (if that falls before the date of first instalment). There is nothing that says that the spouse must continue to live with the pensioner until their death, or even remain married, to maintain entitlement, as this would be inequitable in the circumstances. Once the first pension payment is made, the spouse is “locked-in”, and will receive the rest of the pensioner’s pension contributions upon that pensioner’s death, despite any beneficiary designation to the contrary.
A spouse’s automatic statutory entitlement to your pension upon your death can only be circumvented in three situations:
(1) the former member and his/her spouse are living separate and apart on the date of the first instalment;
(2) the former member and his/her spouse are living separate and apart on the date of death of the member, provided he/she dies before the date of first instalment; or
(3) the spouse signs a waiver releasing his/her statutory rights to the death benefits and submits it to the appropriate authority within 12 months of the date of first instalment.
Final thought
Remember, if you separate from your spouse before retirement and have that person named as the beneficiary of your pension, you will need to change this beneficiary designation to prevent them from receiving your pension benefits upon your death. Although this person will no longer have an automatic right to receive your pension as they no longer qualify as an eligible spouse, they will still inherit if named as the beneficiary – and you do not have a new spouse.
[This article originally appeared in the September 2018 issue of Fifty-Five Plus Magazine.]
For any questions on preparing your Will, please contact our Wills and Estate Planning group.
