# Commute pension?



## Money172375 (Jun 29, 2018)

I know there are a lot of factors and personal choices to make, but wanted to get a sense of the community’s take on commuting a pension or not.

44 years old.
Option to commute 250,000 to a locked in account and 150,000 in cash.
RSP room under $10,000
Or take a Pension of $2400 month at 65. Not indexed to inflation.

I would think that while commuting may result in a 75,000 tax hit, investing the rest in a balanced portfolio earning 5% a year would put me further ahead. Thoughts?


----------



## james4beach (Nov 15, 2012)

Pensions are promises for payments in the future. What is the nature of the counterparty here? Is it a corporation? Government?

If it's a corporation, what kind of shape are they in?

A realistic forecast for a balanced fund return is probably around 3% to 4% real return. For example CAGR of 5% less inflation 2% = 3% real return.


----------



## Money172375 (Jun 29, 2018)

james4beach said:


> Pensions are promises for payments in the future. What is the nature of the counterparty here? Is it a corporation? Government?
> 
> If it's a corporation, what kind of shape are they in?
> 
> A realistic forecast for a balanced fund return is probably around 3% to 4% real return. For example CAGR of 5% less inflation 2% = 3% real return.


It’s a major Canadian FI.


----------



## birdman (Feb 12, 2013)

If the 150,000. is part of an employee severance payment you may wish to see if they will offer you a SERP (Supplemental Employee Retirement Plan) where the employer would pay the $150,000. over a fixed term with interest. Ideally, it would be nice if they could pay the interest on the amount and compound it and add it to the 150,000. and then you start taking it in monthly payments plus interest over a term of say 15-20 yrs when you retire.
https://www.benefitscanada.com/pensions/governance-law/what’s-happening-with-serps-4904


----------



## fireseeker (Jul 24, 2017)

Money172375 said:


> I know there are a lot of factors and personal choices to make, but wanted to get a sense of the community’s take on commuting a pension or not.
> 
> 44 years old.
> Option to commute 250,000 to a locked in account and 150,000 in cash.
> ...


Remember, the two options are actuarially equivalent. There should be no significant financial benefit to taking the commutation -- unless, of course, you want to make a call on interest rates rising.

Personally, I would not focus on whether you can out-invest the pension plan. Instead, I would consider risk and diversification.

By staying in the plan, you hand both investment and longevity risk to someone else. Given that the plan sponsor is a major FI, I assume the plan is well-funded and reliable. (You can check the funding status.)

When you're 65, you will have funds coming from three sources: the government, your savings and the pension plan. That sounds significantly sounder than the two-legged stool alternative.


----------



## Longtimeago (Aug 8, 2018)

What I see unless I am missing something, is a pension of $2400 value TODAY that will not be collected until 21 years from now and that has no inflation index. If inflation were to mirror the last 20 years, that means what cost $100 today will cost $145 20 years from now. That's not really going to be much of a pension is it. I make that the equivalent of getting $1650 a month today.

If you take the money and invest it conservatively, you may not make more or even quite as much as that per month but you will make it starting NOW, not 20 years from now and you will have control over the capital at all times, NOT someone else. What's 20 years of making $1650 a month add up to?


----------



## gardner (Feb 13, 2014)

If you do take the commuted value, remember to familiarize yourself with the LIF rules that apply to your particular LIF. Some things to consider are that the LIF could likely be broken into early in the case of financial hardship. Also the LIF and any capital you commute can be left to benefit people that the pension can't -- eg: adult children.


----------



## james4beach (Nov 15, 2012)

fireseeker said:


> Remember, the two options are actuarially equivalent. There should be no significant financial benefit to taking the commutation -- unless, of course, you want to make a call on interest rates rising.


I didn't know that. Is that guaranteed to be true by regulation?



> By staying in the plan, you hand both investment and longevity risk to someone else. Given that the plan sponsor is a major FI, I assume the plan is well-funded and reliable. (You can check the funding status.)
> 
> When you're 65, you will have funds coming from three sources: the government, your savings and the pension plan. That sounds significantly sounder than the two-legged stool alternative.


I think that's a very strong argument. I have an older relative who also has this, 3 sources of pension income (CPP/OAS, company pension, personal savings) and it gives them a lot of comfort.

That being said, the pension still has to be solid. Some of my friends who also work at a 'major Canadian FI' just had their pension contribution terms changed on them as the company tries to make up for a poorly funded pension. The younger employees are starting to doubt whether the pension will be worth anything by the time they retire.


----------



## fireseeker (Jul 24, 2017)

james4beach said:


> I didn't know that. Is that guaranteed to be true by regulation?


I am not an actuary. Or an expert in pension law.
However, my understanding is that a lump sum payout is simply the present value of the future pension, with variables for calculating that present value prescribed. 
In other words, I do not believe a plan administrator can simply make up their own actuarial assumptions for a lump-sum payout so as to disadvantage the departing member. Taken to its logical conclusion, this would allow plans to abscond with pension money, first by short-changing departing members then by removing the resulting surplus from the plan.

Here is what the Canadian Institute of Actuaries says about how to calculate lump sum payouts:



> 1. What is the formula for calculating the lump sum present value of a pension?
> 
> There is no simple "formula" per se that will allow you to calculate the present value of a pension on your own. The key elements of the calculation - the terms of your pension plan, your personal situation and actuarial standards in effect at the time of the calculation – all get incorporated into the following basic formula:
> 
> ...


----------



## fireseeker (Jul 24, 2017)

Ah, James, you've sent me down an interesting rabbit hole.

It seems changes are being discussed (or perhaps have occurred?) to how commuted values are calculated, meant largely to protect remaining plan members. 
The OP may get some wisdom from this blog post from an actuary, in which he says it is usually a bad idea to take the commuted value:



> To their credit, some very smart actuaries are trying their darndest to calculate the single true market value of an uncertain number of future pension payments beginning at some unknown future date. This is an impossible task given all the uncertainties and different perspectives of the various stakeholders (i.e. the member, the pension plan sponsor, the remaining members in the plan, the regulators, etc.). You then layer on the tax rules, which these days often force a significant portion of the commuted value to be paid after tax, virtually guaranteeing that the remaining funds will not be enough to replicate the foregone pension income.


https://www.actuarialsolutionsinc.com/pension-commuted-values-revisted/


----------



## ian (Jun 18, 2016)

Another consideration.....you commuted value payout will highest when interest rates are low, and when they are projected to remain low. The commuted value of a pension is not static. 

The tax hit on taking the commuted value will be, I believe, dependent on the pension plan. When I was given a commuted value statement it indicated the amounts that were taxable in my hands (unless I had RSP room which I did not) and the amount that could be rolled over.


----------



## Money172375 (Jun 29, 2018)

Thank you everyone. I’m leaning towards commuting. I like the residual estate benefit and having control with respect to higher/lower payouts through an eventual LIF. I assume 50% could also be unlocked at some point. Federal jurisdiction. 

I’ve started a separate thread in taxation to see if anything can be done to minimize taxes on the unsheltered portion....other than the obvious RSP contributions. 

My former employer did introduce a “second” pension plan for new employees and closed the old plan to new membership. The new plan was still a DB (from my memory, but much weaker). I have full confidence that the older plan is rock solid.


----------



## Longtimeago (Aug 8, 2018)

james4beach said:


> I didn't know that. Is that guaranteed to be true by regulation?
> 
> 
> 
> ...


It's funny how different people can look at the exact same thing and see something entirely different. You think locking in the money at age 44 to provide a pension at age 65 is a good thing. You see letting someone else control that money during those next 21 years as a good thing. I see the exact opposite. 

As for 3 legged stools, there is nothing to stop the OP for using the money to provide as many legs as he wants. Why limit the stool to 3 legs? ie. half invested in a Seniors Home which will provide an income from today and yes in retirement as well. Half invested in a mobility scooter company which will do the same. Come retirement, he will then have a 4 legged stool by the way you guys count.

By the way, my wife and I have 8 sources of income in retirement. What kind of stool does that make. Check this out, I found one and it's only $3600.
https://www.pamono.ca/8-legged-stool-on-wheels-by-wendy-andreu


----------



## Eclectic12 (Oct 20, 2010)

Money172375 said:


> ... I’m leaning towards commuting. I like the residual estate benefit and having control with respect to higher/lower payouts through an eventual LIF.


Keep in mind that whatever amount you choose from the LIF has to fit the minimum to maximum range - which is why people tend to transfer to a regular RRSP/RRIF to have no schedule or only have a minimum, where they can. https://www.taxtips.ca/pensions/rpp/minmaxwithdrawals.htm

It doesn't look like the max LIF withdrawal for a federally regulated LIF hits double digits until age 80 and then by age 90, it's 100%.




Money172375 said:


> ... I assume 50% could also be unlocked at some point. Federal jurisdiction ...


Age 55 or older. Officially it is written to depend on the earliest age one could have taken a pension. I'm not sure there is much follow up though, especially as a lot of plans allow a reduced pension at age 55.


Cheers


----------



## ian (Jun 18, 2016)

Here is another side to the commute pension discussion. My employer, in 2000, came out with a plan to convert DB members to a DC plan. The then commuted values would be converted into a DC plan and employees would supposedly benefit from a PAR that they could immediately take advantage of. A number of us were grandfathered...we had the choice to stay or migrate. I stayed because the commuted value was not high. I also wanted that third stool. It was an IT company, a large one, that was having some challenges. At the time it was easy to make 10, 15 points in the internet boom. For many, the estimated PAR was much higher than the actual number than came with the final statement....somewhat misleading.

Fast forward a few years later. Many of those who selected and migrated to DC were not happy. The market collapse had substantially reduced their DC balances. Some said their losses were in the 40 percent range. For a number of years the employer was making substantial additional contributions to the DB plan in order to keep the plan funded to the requisite levels. I was fortunate. It was a small DB plan and the employer was committed to honouring the obligations.

So, while there is no doubt upside to managing and controlling your own investments, there is also risk. One needs to balance the risk and rewards. There is no one right answer for everyone. Ten years later I was very thankful that I had chosen to remain in the DB program.


----------



## gardner (Feb 13, 2014)

Money172375 said:


> I assume 50% could also be unlocked at some point. Federal jurisdiction.


It is best to ascertain the exact rules that would apply to your LIRA and not make any assumptions. You should be able to know the exact province of jurisdiction and see all of the exact restrictions the administrator plans to impose. There is good information about the exact rules that operate on a province by province basis. Start with:

https://www.taxtips.ca/pensions/rpp/unlockingrpp.htm

You may easily be able to break into it at 50, if you retire early and have low/no income for a period in early retirement, for example.


----------



## Eclectic12 (Oct 20, 2010)

^^^

The main idea is good but some of the info seems to be ignoring the info the OP has provided.

Provincial jurisdictions listed by the link can be skipped as the Feds have been identified as the pension authority. The *Federally Regulated Pension Plans Unlocking* section, under *One-Time 50% Unlocking* seems the most appropriate.


Cheers


----------



## sags (May 15, 2010)

My pension has comprehensive and significant benefits attached to it, plus nursing home coverage and term life insurance.

I had a commuted value calculated and it was very low. I took the monthly pension and in 15 years have already collected more than the commuted value in monthly pension benefits.

My pension has a 2/3rds spousal benefit so it is guaranteed income for both for us for life.

There is also the pension income tax deduction and pension splitting between partners which lowers taxes.

Lots of considerations besides the investing of the capital for a sufficient return. Everyone has a different scenario.


----------



## kelaa (Apr 5, 2016)

Can someone explain why commuting a pension would result in a significant portion of the payout being taxable? 

For instance, take the following two cases. Does the tax system treat the two cases differently? Why would #2 have a significant unsheltered portion at their retirement where #1 would not? Is that not inequitable to tax payer #2? Is it because the "remaining RRSP room" was static in #2, whereas it effectively expanded with the value of the investments in #1?

1) someone without a pension would gain RRSP room at 18% of earned income per year. They contribute the full 18%.
2) someone paying 9% of earned income into DB pension, with 9% contribution by employer. There is a pension adjustment and likely some remaining RRSP room left over.


----------



## ian (Jun 18, 2016)

There is another issue that people need to be aware of when taking the commuted value and rolling it over to a self administered plan. Human nature.

When I working I had access to stats on how many employees actually logged into their DC accounts to either check on the balance, or even worse, make changes to their investment allocations. The latter was in the single digit range. I found this surprising, just as I did the number of ees that did not take advantage of all of the matching programs.

The risk in the market is compounded by the risk that some bring on themselves by not paying attention to their personal finances and investment choices.


----------



## sags (May 15, 2010)

Human nature and the monte carlo scenario.

Human nature.........lottery winners/heirs/celebrities/sports figures ending up bankrupt and DIY investors who aren't very good at it.

Monte carlo scenario........nobody knows what the economic climate will be when they decide to retire and live off the proceeds.

I know several teachers......a couple took the commuted value, lost 40% during the recession and had to find jobs somewhere. Others kept the pensions and lost nothing.

On the other hand, a friend who took the pension passed away a few years after retirement and her family didn't get anything from her pension or late husband's pension.

So many considerations. It isn't as easy as people like Garth Turner say it is.


----------

