What happens to a defined contribution pension plan when you die?
With a defined contribution pension plan (DCPP), generally both you and your employer contribute a percentage or fixed portion of your salary over the time you’re working.
When you retire you can convert that money into retirement income. The amount of income you receive depends on how much has been contributed to the plan and how well the plan has been invested.
If you pass away before you start receiving pension benefits and you’re fully vested, money in your DCPP will be given to the beneficiary you’ve designated on the plan. Keep in mind that if you have a qualified spouse at the time of your passing, your spouse is entitled to the pension benefit, even if you’ve designated a different beneficiary, unless your spouse has waived entitlement to the plan. If there’s no qualifying spouse or designated beneficiary at the time of your death, money in your DCPP will be payable to your estate.
Being vested in a DCPP means you’re entitled to the full benefits from your pension plan including your employers’ contribution to your plan.
If your spouse is entitled to your pension plan at the time of your death, they’re a member of an employer-sponsored pension plan, and the rules of their pension plan allow a transfer of your DCPP money to your spouse’s pension plan.
Funds from your DCPP paid in cash to your spouse, beneficiary, or estate will have applicable taxes withheld in the year they receive the payment unless a tax exemption applies.
For a spouse beneficiary, depending on applicable pension and tax legislation, the death benefit from your DCPP may be transferred as a lump-sum on a tax-deferred basis to your spouse’s registered retirement savings plan (RRSP), registered retirement income fund (RRIF), locked-in retirement account or to your spouse’s registered pension plan if the rules of their plan allow it.
What happens to a defined benefit pension plan when you die?
A defined benefit pension plan (DBPP) provides a certain amount of monthly retirement income. There are different formulas used to determine how much retirement income the DBPP will pay to members. Depending on the plan both the employer and you may be required to contribute to the pension plan.
If you die before you receive your first pension payment, the rules of your DBPP and applicable pension legislation will determine which of your eligible spouse, dependent children, designated beneficiary or estate will receive an entitlement to your pension. Depending on eligibility requirements, the benefits may be paid in the form of a survivor pension, lump sum payment, or both.
If you die after you begin receiving pension payments, most DBPPs will have rules on elections you’ll need to make before you begin receiving pension payments, which determine who is eligible to receive payments after you die and how much each payment may be.
Most commonly, a qualifying spouse will be entitled to survivor pension payments that are a percentage of your pension (50% to 100%) and paid for your spouse’s lifetime.
If the value of your DBPP at your death is small, the pension plan rules may allow a lump-sum payment to your spouse instead.
You should consult with your pension plan administrator to find out the rules for your plan and your options.
What happens to a pooled registered pension plan (PRPP) or voluntary retirement savings plan (VRSP) when you die?
With a PRPP
A PRPP is a retirement savings options for individuals who don’t have access to a workplace pension plan, including those who are self-employed. A PRPP helps members benefit from reduced administration costs by grouping contributions from members of many different employers in a large, pooled pension plan.
How a PRPP will be handled when you die depends on the applicable legislation and the rules of the PRPP.
Unless there is a successor member to the PRPP, the Canada Revenue Agency (CRA) considers your PRPP funds distributed immediately before your death. The fair market value of the assets held in the PRPP account are included on the deceased member’s final income tax and benefit return.
If you have a surviving spouse, that person becomes a successor member of the plan, taking over ownership and future direction of the PRPP account. Generally, the successor member is entitled to transfer the PRPP funds directly, on a tax-deferred basis, to purchase an immediate or deferred life annuity or into another registered retirement savings vehicle, which may or may not be locked-in under the applicable legislation.
If the value of your PRPP is low, the rules of the plan may also provide for your surviving spouse to unlock and withdraw the proceeds in cash or transfer them to an unlocked registered vehicle such as a RRSP or a RRIF.
If you die without leaving a surviving spouse, or if your surviving spouse surrenders their entitlement the PRPP account, the funds will be paid to your designated beneficiary, or to your estate if you did not name a designated beneficiary to your PRPP. Funds payable to a beneficiary or your estate are not locked-in but will have immediate tax consequences.
With a VRSP
A VRSP is a savings plan that can be offered by Quebec employers to their employees to help them reach their retirement savings goals. It’s voluntary, so both the employer and employee decide whether they want to contribute.
With a VRSP, when you die, the total amount credited to locked-in and not locked-in accounts will be paid in priority to your qualifying spouse.
If that person renounces their rights to receive that amount, or if there’s no qualifying spouse, the total amount will be paid to your designated beneficiaries or, if none, your heirs.
What happens to government pension benefits when you die?
With the Canada Pension Plan (CPP), when you die, your eligible spouse or common-law partner may apply and may be entitled to receive a monthly CPP survivor pension. Eligibility and the amount of CPP survivor pension your spouse receives will depend on different calculations and rules of the government’s CPP program.
In addition to the CPP survivor’s pension, your eligible dependants and your estate may apply and may be eligible to receive a CPP death benefit or benefits for children under 25. The CPP death benefit is a one-time, lump-sum payment made to your estate or other eligible individuals on your behalf.
For the Quebec Pension Plan (QPP), if you meet the contribution requirements, your qualifying spouse and your qualifying children may be entitled to receive a monthly QPP benefit. The amount varies based on various factors. The surviving spouse’s pension is payable for their lifetime while the orphan’s pension is payable for a maximum of 12 month and ends when the child turns 18.
In addition, a lump-sum death benefitOpens a new website in a new window of $2,500 may be payable to the person or charitable organization that paid for the funeral expenses if it’s applied for within 60 days following your death, or to any other person, if an application is filed after that period.
With Old Age Security (OAS), when you die, your benefits must be cancelled. Benefits are payable for the month in which you die, however benefits received after that must be repaid.
What happens to your other retirement savings when you die
The treatment of your registered retirement income fund (RRIF), registered retirement savings plan (RRSP) or tax-free savings account (TFSA) when you die will depend on whether you designated a beneficiary, have a qualified beneficiary, or a successor annuitant/holder for these retirement savings.
With a RRIF
When you die with money still in your RRIFOpens a new website in a new window, if the beneficiary of the RRIF is a spouse or common-law partner, they’re a qualified beneficiary and the RRIF funds can be transferred as a tax-deferred rollover, directly or indirectly to the qualified beneficiary’s RRSP/RRIF or used to purchase an eligible annuity.
It’s also possible to name a successor annuitant to the RRIF, such as a spouse or common law partner, or a financially dependent child or grandchild. When you die, the existing RRIF continues and your successor annuitant can continue to receive the same RRIF payments and be taxed on any payments made from the RRIF each year as you did while alive.
With an RRSP
When you die with an RRSP and the beneficiary is your estate or a non-qualified beneficiary or there’s no beneficiary designation made, the CRA considersOpens a new website in a new window you to have received immediately before death, an amount equal to the fair market value of all the property held in your RRSP at the time you died. With some limited exceptions, this amount and all other amounts you received from your RRSP in the year of death have to be reported on your income tax and benefit return for the year of death.
An exception is when you have a qualified beneficiary to your RRSP such as your spouse or common-law partner. In this case, the CRA doesn’t consider you to have received an amount from your RRSP at the time of death if by December 31 of the year following the year of death, all RRSP property is directly transferred to an RRSP, PRPP, VRSP, or RRIF of the spouse or common-law partner, or used to buy an eligible annuity for the spouse or common-law partner.
With a TFSA
When you die with a TFSAOpens a new website in a new window, in provinces or territories that recognize a TFSA beneficiary designation, you can designate a successor holder to the TFSA. A successor holder is limited to a spouse or common-law partner.
If named, the successor holder will become the new holder of the TFSA immediately upon the death of the deceased holder. The value of your TFSA does not affect the TFSA contribution room of your successor holder.\
Alternatively, you may name a designated beneficiary of the TFSA. As long as they do so before December 31 of the same year, spouses or common-law partners who are designated as the beneficiary of your TFSA (not as successor holder), may contribute the whole value received from your TFSA into their own TFSA without affecting their unused TFSA contribution room.
Other designated beneficiaries such as children, may contribute any amounts received from your TFSA to their own TFSA, assuming they have unused contribution room available.
Beneficiary designation
In Quebec, not all investment products offer you the possibility to name a beneficiary. Generally, only insurance and trust companies can offer products with that feature. If no beneficiary designation can be made, you’ll need to make sure your will is drafted properly to allow a tax-free transfer.
The importance of estate planning
Estate planning is arranging your affairs so that when you die you preserve property and distribute it how you want.\
Estate planning is important because it helps:
- Minimize disputes over your assets between those you leave behind
- Ensure your loved ones are taken care of
- Minimize your tax liabilities
Part of estate planning is keeping your will and designated beneficiaries up to date, especially after major life events such as marriage/remarriage, divorce, or the birth of a child.