# Choosing a commuted value (CV) pension or a defined benefit (DB) pension



## leoc2 (Dec 28, 2010)

I need assistance in making a decision to either commute my pension or to stay in a defined benefit pension plan. My employer has a deadline of December 2011. At this time I will be the age of 55 and I can no longer choose the CV pension option.


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## MoneyGal (Apr 24, 2009)

You should compare your options on an after-tax, present-value basis. 

You will need some actuarial assistance to do this. 

There are consulting actuaries who will help you understand the present-day value of lifetime streams of income. 

Don't be mislead by someone who says, "assuming you live to age x" - this is overly simplistic.


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## sags (May 15, 2010)

There are other things that you need to consider as well.

Your pension is probably indexed to the cost of living.

It probably has a lifetime spousal benefit.

You may lose life insurance, or health benefits if you leave the pension plan.

All the above are valuable things to give up.

It looks like you would end up in the 600,000 range, after taxes.

I doubt it is possible to generate 50,000+ income from that amount of capital. To do so would mean taking risk when you can least afford losses.

Just as an anecdote.............I know a teacher who had some of her colleagues take the commuted value and invested it. They thought they could do better than staying in the pension plan. She says they got crushed in the downturn and are back working somewhere again.......she is happy she stayed in the guaranteed pension plan.

In the civil service, your pension plan is guaranteed. The only reason I can see for people to take the commuted value is if they are concerned with the financial health of the pension plan. 

Just be real careful, as you only get to make the decision once.


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## Plugging Along (Jan 3, 2011)

I've just been speaking with my financial advisors and accountant on a similar situation. 

The general thoughts from both of them is that very few investments can out perform a DB pension for the same amount of risk. They pretty much told me that is was a no brainer for me to leave it in the pension instead of investing it myself. That comes from the guy who would make money from me if I took the money out.

I know every person is different, but they had told me there a few exceptions to this.


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## the-royal-mail (Dec 11, 2009)

leoc2 said:


> Accepting a CV means must leave my $90,000/year civil servant job. I don’t think I can easily find a new job with equal pay.


Yikes! You need professional assistance far beyond what is reasonable to request in an Internet forum. Seriously. We can recommend who to go and see, but I don't think this is the right venue for you to get answers for something so important.

That said, what I'm not seeing in your post is the WHY. Why on earth would you consider leaving your top notch situation? Are you being forced out/downsized/fired or is it your choice? This doesn't make sense to me.


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## andrewf (Mar 1, 2010)

My prima facie impression is that the DB is the better option. But, as MG says, you're better off taking a more actuarial approach.


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## fraser (May 15, 2010)

Ten years ago my employer was trying to move people from DB to DC. I was grandfathered because of age and service so I had a choice. The wags in the office were all recommending that we take the commuted value and move to DC. I was in the high tech environment and dot coms were flying.

Ten years later, I have just left the company and am vested. I am extremely thankful that I remained in the DB. My calculations indicate that my my employer's contribution to my pension- commuted value plus er's DC contributions ten years later, at average returns for the period, would only be worth about 45-50 percent of the current commuted value of my DB plan I feel even more grateful for this decision after reading Pensionize Your Nest Egg. I would stick with DB and with your current employment-unless you have serious health issues that indicate a reducted life span.


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## leoc2 (Dec 28, 2010)

Thanks to all respondents. 



> MoneyGal
> There are consulting actuaries who will help you understand the present-day value of lifetime streams of income.


MG, I will be talking to a fee based financial planner. I have two candidates one form "Longhurst William Jack" and the other from "Weigh House Investor Services". Do you think they will be versed in actuarial calculations?


> sags
> Your pension is probably indexed to the cost of living.
> It probably has a lifetime spousal benefit.
> You may lose life insurance, or health benefits if you leave the pension plan.
> Just as an anecdote.............


sags, My pension is indexed to CPI. It is not 100% indexed but very close. The pension plan has some of my years of service under an affordability clause. There is a (60%) survivor benefit with my DB pension My health benefits is a non issue as my wife's pension plan has me covered. Your anecdote is appreciated. 


> the-royal-mail
> Yikes! You need professional assistance far beyond what is reasonable to request in an Internet forum. Seriously. We can recommend who to go and see, but I don't think this is the right venue for you to get answers for something so important.
> That said, what I'm not seeing in your post is the WHY. Why on earth would you consider leaving your top notch situation? Are you being forced out/downsized/fired or is it your choice? This doesn't make sense to me.


TRM, don't fret, I will not use an anonymous forum to make a life critical decision. My post here is a curiosity experiment. You and other posters on this board seem to have good financial sense and I am curious of your opinions. That's it nothing more. As for leaving my top notch situation ... I don't have to leave. I can stay at my post. The only time critical event is the deadline to accept a commuted value for my pension. In other words: Under age 55 (for me, my last day at age 54 is December 2011), I have a termination option to consider. I can transfer the commuted value of my pension benefit out of the my DB pension plan. Once I reach age 55, the commuted value transfer is no longer an option and I would continue happily working at my job.


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## MoneyGal (Apr 24, 2009)

Longhurst and Jack are actuaries.


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## OptsyEagle (Nov 29, 2009)

The DB pension is the better option, handsdown. I will give you $800,000 and a trip to Disneyland for your whole family for that pension you describe, right now.


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## MoneyGal (Apr 24, 2009)

OptsyEagle said:


> I will give you $800,000 and a trip to Disneyland for your whole family for that pension you describe, right now.


And you'd still be getting it at a substantial discount. (See the second column of page two in this article for a reference.)


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## steve41 (Apr 18, 2009)

leoc2 said:


> I need assistance in making a decision to either commute my pension or to stay in a defined benefit pension plan. My employer has a deadline of December 2011. At this time I will be the age of 55 and I can no longer choose the CV pension option. Accepting a CV means I must leave my $90,000/year civil servant job. I don’t think I can easily find a new job with equal pay. I have RRSP/TFSA savings of $150,000 and non sheltered savings of $50,000.
> 
> Option 1: CV pension
> Value = $800,000:
> ...


OK.... I need more detail. What is the 150K RRSP/TFSA breakdown? Are those DB pension amounts indexed? are they integrated with CPP? i.e. do they decline by the amount of CPP at 65?


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## HaroldCrump (Jun 10, 2009)

OptsyEagle said:


> The DB pension is the better option, handsdown. I will give you $800,000 and a trip to Disneyland for your whole family for that pension you describe, right now.


MG is right.
I'll top that offer by giving you $950,000 and a trip to Disney_world_ instead of Disney_land_.

As soon as I have accumulated $950,000 I mean


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## leoc2 (Dec 28, 2010)

*MoneyGal, thanks for the article.*


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## kcowan (Jul 1, 2010)

You best bet is to work until 65. So if you like and can tolerate w*rking that much longer, you should do it. Retiring early makes no sense unless you have a lower than normal life expectancy.

The only other condition that would swing this any other way is if you can find another job paying well that will accrue another COLAd DB pension after 10 years. But then why change unless there are other conditions forcing it?


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## steve41 (Apr 18, 2009)

A quick run (I ran you as a single person, BTW) assuming a 5% ror, 2% infl, living in ON, the 'retire now' DB projection delivers a $48.3K die-broke-at-95 ATI of $48.3K and the CV option (assuming the taxable portion is taxed at 30% divs, 30% capgains, 40% interest) delivers $45.6K.

This is very tentative, I can post the runs if you desire.


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## steve41 (Apr 18, 2009)

OOPS. I neglected to ask the most important question..... is estate a concern? This makes a big difference.


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## leoc2 (Dec 28, 2010)

kcowan,
The only issue is the expiration of the CV option. I am healthy and I like my job.

steve41
Thanks for running the numbers. Posting the runs is not necessary.


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## sprocket1200 (Aug 21, 2009)

take the DB! someone has to pay all the taxes for the retirement benefits we receive...


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## Brian Weatherdon CFP (Jan 18, 2011)

*awesome forum*

With such a rich DB pension, and the few specifics you mention, I too agree staying in the pension plan makes most sense. 

Someone kindly mentioned it's too vital a Q to raise in this forum - yet here's the real purpose, ie. to gain a rich, varied response from others. Gone are the days one could ask a wise neighbour. Cheers to all sharing here!

B


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## sprocket1200 (Aug 21, 2009)

steve41 said:


> OOPS. I neglected to ask the most important question..... is estate a concern? This makes a big difference.


shhhh, don't tell them that. once they figure this out, they won't want the pension and won't be paying all those taxes when they are retired!!


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