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Thread: Commuted Value of Pension Plan

  1. #1
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    Question Commuted Value of Pension Plan

    What would you do? Only 1 year until retirement with a monthly pension or take the commuted value? Have to add that the company may or not make it during the economic downturn.


  2. #2
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    I'd talk to a financial planner - or better yet, a few of them - and seek their advice. A lot of the decision comes down to the security of the pension itself versus the security of the funds if they're in your hands.

    If the company fails, that doesn't necessarily mean that the pension plan will fail. That said, it's a possibility.

    If you take the commuted value, there's the risk that those funds will drop in value or not grow enough to provide you with the lifetime income you would have received from the pension.

    There are risks on both sides, so it'll be up to you to get some professional advice and make your own call as to what'll let you sleep at night.

  3. #3
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    There may be another option...under the pension act , you can take your pension commuted value to an ins company and buy an annuity which 100% mirrors your actual pension plan...including bridging and spousal benefits,,this eliminates having to take a large lump sum in taxable cash as CRA limits the amount of your commuted value you can tfr directly into a locked-in plan based on age and years in the plan...the highest amount I have seen is just under 400k..the balance had to be taken in cash..which in some cases means 200k+ in taxable cash.

    Its unfortunate that GM employees weren't made aware of this 6 months ago..I fear now it may be too late for them to exercise this unknown option.

  4. #4
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    Talking

    I've already talked to two financial advisors and one thinks I would do better with the commuted value. The other one said that the pension would be better. Of course it is ultimately my decision and I just want to make the best informed decision that I can. Buying an annuity is an option but with interest rates so low the timing is not good. I just wish I had a crystal ball!

  5. #5
    Administrator CanadianCapitalist's Avatar
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    Quote Originally Posted by johnsazzr View Post
    There may be another option...under the pension act , you can take your pension commuted value to an ins company and buy an annuity which 100% mirrors your actual pension plan...including bridging and spousal benefits...
    That's very interesting. Good to know.
    Canadian Capitalist -- Helping you invest & prosper

  6. #6
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    Don't forget that if you take the commuted lump sum, you may have to forfeit other retirement benefits ie. health care coverage.

  7. #7
    Senior Member MoneyGal's Avatar
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    Depending on the financial advisor, he or she likely has a (hidden) interest in recommending you take the commuted value: he or she has no chance of managing the pension option, while, if they work on commission, would love to take a large lump sum under management (what's 5% of the lump sum?!)

    Another way of looking at this is to determine the implicit rate of return in the pension option. You will need to assume a life expectancy to make this calculation, and you will need to either be able to run the math functions in Excel or use a financial calculator.

    If the implicit rate of return is, for example, 3%, you could then determine whether you would be comfortable taking on additional risk in order to boost your return, if you managed the funds yourself.

    Another factor in the decision is that if you manage the funds yourself, you will need to do so for the rest of your life. If you receive a pension, you will never need to do anything to manage that money (presuming the plan remains solvent).

    Purchasing an annuity is another way to reduce the number of financial decisions you need to make, but this is generally a TERRIBLE time to purchase an annuity.

    Another consideration is whether you have funds outside the pension plan or not. You could structure your overall holdings such that your pension income is treated like fixed income (which it essentially is!), and the remainder of your portfolio includes your pension income as a fixed income allocation.

    There's a lot to think about.

  8. #8
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    The company I work for no longer gives health/dental benefits when you retire. This is one of the reasons that I am contemplating leaving after almost 40 years. Someone suggested a LIF, but I don't know much about them. Are they like an annuity?

  9. #9
    Senior Member MoneyGal's Avatar
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    When you have a locked-in retirement account, and you reach the age at which this account must be converted (or before), you must convert your LIRA to a LIF, an LRIF, or a life annuity.

    A LIF (life income fund) is like an LRIF, except, in addition to minimum withdrawals that must be taken into income each year, LIFs have maximum withdrawals beyond which you cannot take out income.

    In addition, in most provinces LIFs must be converted to life annuities when the annuitant (the LIF holder) turns 80.

    A LIF is a less-flexible option than an LRIF. They aren't my favourite investment vehicles.

  10. #10
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    Post Be Careful About Taking Commuted Value

    If your employer and the pension plan are both in bad shape when you retire taking the commuted value is still very likely to be a worse option than taking the lifetime pension. You should be able to obtain information directly from your plan sponsor and/or administrator. The basis for calculating commuted values has just been changed resulting in smaller values which are much less than the actual value of the lifetime benefit.


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