Taking your Pension vs a Commuted "Lump Sum" Value
7 considerations when making the decision.
Have you recently changed employers or been laid off? As a member of a defined benefit pension plan (DCPP) you may have the option to choose between keeping the pension or taking the commuted "lump sum" value. The commuted value is usually mathematically equivalent to the value of the pension through the plan. Both options provide their own unique benefits to you and hopefully these 7 considerations can help you make an informed decision with the help of your financial advisor.
1. Flexibility
If you have trouble budgeting and usually spend your whole pay cheque, a pension can protect you from yourself. If you need flexibility in your income, the commuted value is an attractive option. You are allowed to set your monthly payments within maximum and minimum limits as set by Revenue Canada.
2. Pension Related Benefits
Some pension plans allow you to maintain certain benefits (health and dental, life insurance) making it a better choice due to the additional benefits you will receive.
3. Survival
Your life expectancy is an important criteria to consider when deciding which option is best for you. If you are in good health or looking to protect the income of your spouse, a pension maybe a better choice. If you have a reduced life expectancy or are in poor health, the cash value is likely a better option. The cash value payment is also a great option if you don't have a spouse and wish to leave an inheritance for your children or grandchildren.
4. Total Income and Assets
If the cost of living in retirement will use the majority of your income, a pension is a better option. However, if your pension only makes up a small portion of your retirement income, the commuted value could be the better option. If your living expenses only use a small portion of your income, managing the lump sum value can be less of a concern as there is a buffer to mitigate lower returns.
5. Tax Repercussions
The lump sum transfer allows you the flexibility to optimize your payments, and base your withdrawals around tax brackets and old age security to reduce income tax and the OAS clawback.
6. Investor Profile
Peace of mind is something that all retirees are looking for in retirement. A pension is an excellent option for providing peace of mind and are best suited for individuals with conservative investor profiles, and who are concerned about market volatility. For those who have financial independence and a higher risk tolerance, the commuted value may be the better option as it provides the opportunity to achieve greater returns through an investment portfolio.
7. PENSION Plan's Financial Situation
If the pension is enhanced, only current plan members will benefit from the enhancement. If you transferred out you will not benefit. The cash value is paid out according to the solvency ratio of the pension. If the plan is in a deficit situation, it may result in a lower cash value being transferred to you.