# Value of newly vested pension



## gt_23 (Jan 18, 2014)

I'm in a DB pension at work which will be vesting in the next couple months (2 years in). I'm considering making a move externally and trying to understand what I'd be giving up in terms of the pre-vested pension vs. if I waited until it vested.

The pension formula for retirement income is: 1.25% x best 5 year avg base x years of service.

HR won't give me an estimate until its vested and its obviously too sensitive to discuss with colleagues given the circumstances.

I'd appreciate insight from anyone who might have gone through vesting in a similar pension already or is otherwise knowledgeable on these. I'm not looking for precision, just order of magnitude of what the pension might be worth after 2 years. Thanks.


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## Spudd (Oct 11, 2011)

The CV of my similar pension (except 1.33% instead of 1.25%) for 14 years of service was around 200k on my December statement. So you might be looking at 25k-ish, totally rough estimate.


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## NorthernRaven (Aug 4, 2010)

If you are looking for a transfer (commuted) value, wouldn't it depend on your current age, and probably gender, and other stuff? They calculate those values with mortality tables, the starting age of the pension, and other stuff that might vary.


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## Spudd (Oct 11, 2011)

Oh, good point NR. I hadn't thought about that.


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## NorthernRaven (Aug 4, 2010)

Presumably if you leave early, you'll get a return of contributions, plus interest. Not only are you losing out on the ability of the pension fund to invest (probably) better than you, and the mortality credits that come with a pension/annuity system, but your employer has been making contributions (50-50 match? better in some govt pensions), so the amount that you'll have built up in the pension system once it vests would be larger than merely your own contributions. If you have $N for your own contributions, after vesting you might have $2xN feeding into the commuted value; you'd lose the employer part if you leave before.

I don't know how much better off you'd be leaving 1 day before vesting versus 1 day after, but it would be something.


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## NorthernRaven (Aug 4, 2010)

If you are under the early retirement age (currently 55 for the feds, for instance), are vested, and you leave the employer, you can take _either_ the deferred annuity, or a lump sum "transfer value" - that's the commuted value that the OP's HR apparently won't future-calculate for him. You might want to take the lump sum if you think you are a super good investor and can beat the pension value by a goodly amount (I'd be skeptical), or don't fancy your chances of living to enjoy the pension, or whatever. The lump sum must be transferred into another pension plan, or something like a Locked In Retirement Account (LIRA).

Some of the various government and private sector DB plans have pension transfer agreements that let you transfer your credit between them, so if you are going from one DB employer to another there's a chance of buying into the new system with the old vesting.


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## sags (May 15, 2010)

Have the rules changed ?

Years ago my wife took the commuted value from her 12 year pension plan and we renovated our home with it. (bad decision........big mistake).

I would leave the pension in place.

Most pensioners income is cobbled together with a bit here and a bit there.


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## gt_23 (Jan 18, 2014)

Thanks, this helps. I was figuring somewhere from $10k-$25k, mostly off how much I was accumulating in a previous DC pension plan (it was about 9% of base). I understand there probably will be zero if any growth since there is so little time invested.


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## gt_23 (Jan 18, 2014)

NorthernRaven said:


> Presumably if you leave early, you'll get a return of contributions, plus interest. Not only are you losing out on the ability of the pension fund to invest (probably) better than you, and the mortality credits that come with a pension/annuity system, but your employer has been making contributions (50-50 match? better in some govt pensions), so the amount that you'll have built up in the pension system once it vests would be larger than merely your own contributions. If you have $N for your own contributions, after vesting you might have $2xN feeding into the commuted value; you'd lose the employer part if you leave before.
> 
> I don't know how much better off you'd be leaving 1 day before vesting versus 1 day after, but it would be something.


Thanks for the feedback, I didn't realize the calculations were so complicated. For this particular DB pension, I don't make any contributions so I have no visibility into how much its costing the firm as a % of my base or monthly rate, etc. There's an optional contributory component that would bring the payout to 2% instead of 1.25%, but I'm not contributing to that.

It's definitely nice to have, but I'm not too worried about giving up the DB. I save a lot and am growing multiple sources of income, and any job I go to will likely have a DC at a minimum.


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## gt_23 (Jan 18, 2014)

rikk said:


> I believe once vested, even for that 1 day, you (gt_23) can't touch the pension until at least whatever the earliest e.g. retirement date would have been ... say age 55, or whatever applies to that particular pension. Whereas, at 1 day before, as said, you get your contribution plus interest returned to you. If you leave your 2 years contribution there with no additional contributions what'll it be worth down the road? No idea ... there is an online calculator for GC people here ... which seems to be offline at the moment ... http://pensionetavantages-pensionandbenefits.gc.ca/act/ppntact-actmmbr-eng.html


I just found an FAQ and this is how it would work: If you leave before 2 years of continuous service (i.e. no leaves etc), you get nothing. At 2 years, the pension vests and you are entitled to it. If you leave the company once it is vested you have a couple options: 
1) Purchase a retirement annuity from an insurance company
2) Transfer to your new employers PP
3) Transfer to an RRSP
4) If the pension is considered a "small pension" then it can be taken as taxable cash. In my case, if it's <= $20k this should apply.


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## NorthernRaven (Aug 4, 2010)

sags said:


> Have the rules changed ?
> 
> Years ago my wife took the commuted value from her 12 year pension plan and we renovated our home with it. (bad decision........big mistake).
> 
> ...


This is where my brain starts to hurt - all I know about this stuff is curiosity research, we need MoneyGal back. I know there is a limit in the tax code as to how much of a commuted lump can be transferred into an RRSP or equivalent. The excess can be treated as new RRSP contributions (up to your available room), or taken into a locked-in plan. Perhaps the excess can be taken in cash, although it would be taxable (since the contributions were never taxed). Did you pay tax on commuted value or part of it?

I think most people agree with you that leaving a pension alone is the wise course - play super-investor with your own discretionary funds and let the pension cover your backside!


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## gt_23 (Jan 18, 2014)

NorthernRaven said:


> If you are under the early retirement age (currently 55 for the feds, for instance), are vested, and you leave the employer, you can take _either_ the deferred annuity, or a lump sum "transfer value" - that's the commuted value that the OP's HR apparently won't future-calculate for him. You might want to take the lump sum if you think you are a super good investor and can beat the pension value by a goodly amount (I'd be skeptical), or don't fancy your chances of living to enjoy the pension, or whatever. The lump sum must be transferred into another pension plan, or something like a Locked In Retirement Account (LIRA).
> 
> Some of the various government and private sector DB plans have pension transfer agreements that let you transfer your credit between them, so if you are going from one DB employer to another there's a chance of buying into the new system with the old vesting.


I hate HR, they are so useless at my company. She basically told me to call back the day after it vests and they can calculate it. The problem is, in this case, that kind of defeats the purpose of me wanting to know in the first place! If I wait around to find out and it turns out it's only worth $5k, I will probably be pretty disappointed. On the other hand, if I leave before it vests and its worth $25k, I want the chance to negotiate a signing bonus or something with the new company.

I suspect this is probably the reason they don't want to tell you: they probably have a lot of people jump ship after vesting, much like occurs in January after everyone gets their bonus.


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## NorthernRaven (Aug 4, 2010)

gt_23 said:


> I just found an FAQ and this is how it would work: If you leave before 2 years of continuous service (i.e. no leaves etc), you get nothing. At 2 years, the pension vests and you are entitled to it. If you leave the company once it is vested you have a couple options:
> 1) Purchase a retirement annuity from an insurance company
> 2) Transfer to your new employers PP
> 3) Transfer to an RRSP
> 4) If the pension is considered a "small pension" then it can be taken as taxable cash. In my case, if it's <= $20k this should apply.


Yeah, if you haven't been contributing there would be no return of contributions. Sounds like a small private DB program, presumably under provincial legislation? A non-contributory DB would be pretty uncommon in the public sector or large corporation; those would likely provide the deferred annuity benefit themselves rather than have option (1) with a private annuity. 

I don't know what your situation is, but sounds like you can earn a nice little bundle by sticking around a little while longer?


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## GreatLaker (Mar 23, 2014)

gt_23 your most recent post corresponds to my understanding.

I took the commuted value of a DB pension plan some years ago and the only lump-sum option was to put it into a Locked-in Retirement Account (LIRA) which is similar to an RRSP, except you cannot begin withdrawing from it until you reach retirement age. When turning 71 or any time after retirement age it must be converted to a Life Income Fund (LIF), which is like a RIF, except whereas a RIF has minimum annual withdrawal requirement, the LIF has minimum and maximum annual withdrawal amounts. It is designed to mimic a pension, in that you cannot withdraw it all and blow it. Actual account types and rules depend on the province. Mine is an Ontario LIRA. I could have also taken a deferred pension but there was no option for me to take it as a non-registered lump sum. Maybe there would have been if I had not worked there as long and it was not vested.

There is a good locked-in retirement account roadmap at the following link:
http://www.avrexmoney.com/retirement/locked-in-retirement-accounts-a-pension-road-map/

Ontario pensions are administered by the Financial Services Commission of Ontario:
http://www.fsco.gov.on.ca/en/pensions/Pages/Default.aspx


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## gt_23 (Jan 18, 2014)

NorthernRaven said:


> This is where my brain starts to hurt - all I know about this stuff is curiosity research, we need MoneyGal back. I know there is a limit in the tax code as to how much of a commuted lump can be transferred into an RRSP or equivalent. The excess can be treated as new RRSP contributions (up to your available room), or taken into a locked-in plan. Perhaps the excess can be taken in cash, although it would be taxable (since the contributions were never taxed). Did you pay tax on commuted value or part of it?
> 
> I think most people agree with you that leaving a pension alone is the wise course - play super-investor with your own discretionary funds and let the pension cover your backside!


Yeah I agree, I did a few hours of digging before deciding to post this thread because I couldn't find much elsewhere on the internet. If I do leave, I won't take the value outside of the tax shelter.


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## NorthernRaven (Aug 4, 2010)

gt_23 said:


> I hate HR, they are so useless at my company. She basically told me to call back the day after it vests and they can calculate it. The problem is, in this case, that kind of defeats the purpose of me wanting to know in the first place! If I wait around to find out and it turns out it's only worth $5k, I will probably be pretty disappointed. On the other hand, if I leave before it vests and its worth $25k, I want the chance to negotiate a signing bonus or something with the new company.


Someone who knows what they are doing could probably come up with a ballpark number, given your age/gender, your salary and that 1,25%, and the retirement age at which the pension kicks in. Mortality tables are probably fairly similar, and they could probably give you at least that $5K vs $25K order of magnitude. Or you could check with an annuity company (big life insurance companies, etc), and ask them to quote you an annuity starting at the DB's retirement age providing that 1.25% x 2 x salary amount, deferred until you reach that age. If you are young it may be hard to get a quote on a long deferment, and a private sector annuity might come out at a different cost to your commuted value, but it should be in the right range?


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## gt_23 (Jan 18, 2014)

NorthernRaven said:


> Yeah, if you haven't been contributing there would be no return of contributions. Sounds like a small private DB program, presumably under provincial legislation? A non-contributory DB would be pretty uncommon in the public sector or large corporation; those would likely provide the deferred annuity benefit themselves rather than have option (1) with a private annuity.
> 
> I don't know what your situation is, but sounds like you can earn a nice little bundle by sticking around a little while longer?


Its one of the big 5 banks. I think you're probably right wrt to sticking around. I've got an offer from another company, but if I can't get an idea of the value in advance, then it's probably not worth the risk of giving it up. The downside is that if the pension ends up only being worth $5k at Year 2, then I will have missed out on a great opportunity.


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## gt_23 (Jan 18, 2014)

NorthernRaven said:


> ... ask them to quote you an annuity starting at the DB's retirement age providing that 1.25% x 2 x salary amount, deferred until you reach that age.


That's a great a suggestion. The retirement age is more than 35 years in the future (age 65), so the present value is probably very low indeed. At the end of the day, the value even once vested at Year 2 might be negligible in 35 years relative to the opportunity of the new job and higher current earnings.


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## GreatLaker (Mar 23, 2014)

Calculate the lump sum value that would be needed to provide an annual payment of 2.5% of your salary for the number of years from age 65 to the average life expectancy for a person of your age. Then calculate the net present value of that lump sum where n = the number of years between now and age 65. It will be very interest rate sensitive and life expectancy would just be a guess unless you have access to actuarial tables. Playing around with various interest rates and life expectancies would give you an idea of the range. 

Or as NorthernRaven suggested, find the value of annuity.


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## GreatLaker (Mar 23, 2014)

NorthernRaven said:


> I know there is a limit in the tax code as to how much of a commuted lump can be transferred into an RRSP or equivalent. The excess can be treated as new RRSP contributions (up to your available room), or taken into a locked-in plan. Perhaps the excess can be taken in cash, although it would be taxable (since the contributions were never taxed).


Do a web search for Pension Maximum Transfer Value and you will find information on how the maximum amount of a DB pension that can be transferred to a LIRA is calculated. Then as you said, any excess can be contributed under existing RRSP contribution room (if any), or taken as a taxable lump sum.


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## sags (May 15, 2010)

There may be other retirement benefits connected to receiving a pension to consider. 

My ex-company recently started offering the commuted value of a 30 and out pension. The government changed the rules to allow the choice on Jan 1, 2014.

But.............if you take the commuted value, you have to sign documents that severs your employment and all ties to the company.

Retiree benefits that would be given up are...........employee pricing on vehicles, life insurance, a $1200 a month benefit for nursing homes, legal plan, dental plan, and health care, pretty much the same benefits as those who are still employed.

The only benefit those who took the commuted values kept were the health care, dental and vision benefits, because it is held within a union trust fund, and wasn't included in the calculation of the commuted value.

If I recall correctly, the commuted value paid to my wife was her own contributions only...........and it had something to do with vesting in the pension.

I think..........and I could be wrong..........that vesting used to take place after 10 years, and withdrawing from the pension prior to that resulted in a return of employee contributions only.

Edit.........did some Googling and vesting used to take place after 10 years. People had two choices before they were vested........defer the pension or cash out.

If they cashed out........it was basically "here are your contributions back".


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## My Own Advisor (Sep 24, 2012)

I did the same GreatLaker...but mine was vested in a DC plan when I left...

I took the option of putting my small DC amount into a Locked-in Retirement Account (LIRA) - but I cannot touch this amount until I turn 55.

At that time I will convert my LIRA to a LIF, withdraw the minimum and start moving the money to a non-registered account if TFSA and RRSP remain full.

There was no option for me at the time to take it as a lump-sum.


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## RBull (Jan 20, 2013)

My Own Advisor said:


> I did the same GreatLaker...but mine was vested in a DC plan when I left...
> 
> I took the option of putting my small DC amount into a Locked-in Retirement Account (LIRA) - but I cannot touch this amount until I turn 55.
> 
> ...


I'm curious about the reasoning for converting the LIRA to a LIF as early as possible.


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## NorthernRaven (Aug 4, 2010)

There's a little article on commuted value (PDF), which includes a generic 5-step formula. You'd have to find current appropriate interest rates, and a life expectancy from an appropriate mortality table. As the article notes, the actual CV calculation will depend on the benefits of the plan, so you might have to add in valuation of a bridge payment to age 65, guarantee period, and survivor benefit. But it should give a minimum base. There's some info on methodology at the CIA (actuaries, not spies), and someone has a spreadsheet of appropriate interest rates and other info. You could probably whip up a simple minimum CV calc yourself.


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