For those Canadians that have a company pension plan, the choice between taking the monthly pension or transferring to a commuted value (whereby, you receive a lump sum in a locked in retirement account) can be confusing. Obviously, the answer would depend on your financial position, life expectancy as well as retirement goals. However, these are the key things to consider before making a decision:
1) How long do you think you (and your spouse) will live?
If you think you will (both) live into your 80s or longer, then you will be able to enjoy longer term pension benefits. If you predict shorter life expectancy, then a lump-sum payment will often be better, as the pension will be worthless upon death.
2) How safe is your pension?
Generally, government pensions are safe, but for private companies, pensions are much less secure. Keep in mind that this is not necessarily about the safety of the company pension today, but what happens over the next 30 years? Even the best companies may not survive 30 years. The only good news is that even if a company goes bankrupt, you would still likely receive most of your pension unless the pension plan was significantly underfunded.
3) Is the pension fully indexed to inflation, partially or not at all?
If the pension is not indexed to inflation, this is a significant negative. If the pension is fully indexed to inflation, this is a major plus for the pension.
Should I Take the Company Pension or Commuted Value?
4) Are you reliant on the company pension for health benefits, if they exist?
This can certainly be worth at least $1000+ a year, depending on what is covered. However, consider if you have alternative health benefits first.
5) What are your tax planning goals?
A pension is inflexible for tax planning. You may want more income at one stage of retirement, and less at another. The locked in retirement-account gives you greater flexibility.
6) What are your goals for leaving a financial legacy or gifting?
While not tax efficient, in an emergency you could pull more money out of a LIRA and gift it to someone in need – where you can’t with a pension. A pension also has no estate value, while a locked-in retirement account could have a significant value for your estate, if you are interested in leaving a financial legacy through charitable donations. A free tool for understanding the value of your estate is the TriDelta Retirement 100, where you can see the impact of your legacy by answering just a few questions.
7) What rate of return can you get for your lump sum amount?
By asking this question, you are comparing your monthly pension vs. lump sum amount from a purely financial perspective as well. The idea here is that if you only need a 4% return on your lump sum amount to match your pension income, then it might be better to get the lump sum amount and invest it for higher returns. If you need a 6%+ return to match your pension, then you would most likely want to keep your pension. Pension calculators like this one can help you figure out the financial component as well. However, it is important to keep in mind all the aforementioned “other factors” also and not rely solely on estimated returns.
If you thought this article was beneficial, watch this video conversation about how company pension plans affect individuals.
For help in determining whether you should take your pension or the cash (commuted value), please contact Ted Rechtshaffen at tedr@tridelta.ca or 1-888-816-8927 x221 or 416-733-3292 x221.
