# Decision to take Lump Sum?



## RedRose (Aug 2, 2011)

I know we discussed this a few months back.
I have had the hardest time making this decision, oscillating back and forth.

I am going to the bank to fill out the papers to transfer my husband DB pension funds this week. I realize the interest rates are low and that I will have to pay a 1.25% fee to the bank but I have let 7 months pass by with no decision yet.

I believe I will have more flexibility for it to grow and maybe for generations to come, if I don't touch it for a few years it will compound the interest right?
If I take dividend paying investments I believe they are taxed more lightly?

I am 63, own my own home, and have a couple of hundred in RRSPs too. I am still working very casually, have my husband's CPP and will be getting mine at 65 along with OAS and another small pension.

Can anyone see any big mistake by doing taking the lump sum?
I am so very, very stuck on this decision...


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## MoneyGal (Apr 24, 2009)

RedRose said:


> I have had the hardest time making this decision, oscillating back and forth.
> 
> Can anyone see any big mistake by doing taking the lump sum?
> I am so very, very stuck on this decision...


You do realize that if you take the lump sum, you are going to need to make many many financial decisions for as long as you are alive?


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## Dmoney (Apr 28, 2011)

From what I know of pension calculations they will discount at a certain % to find what you need now to get the equivalent future streams of income. Difference is, if you take the lump sum, you are not guaranteed the future streams because of variance in markets etc. With the DB, you are guaranteed a rate of return equal to the discount rate they use. 

Would be a mistake to take the lump sum unless you can guarantee a better rate of return. Risk isn't worth it in my opinion.


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## OhGreatGuru (May 24, 2009)

RedRose said:


> ...
> 
> *1.* I believe I will have more flexibility for it to grow and maybe for generations to come, if I don't touch it for a few years it will compound the interest right?
> *2.* If I take dividend paying investments I believe they are taxed more lightly?
> ...



1. Yes. Of course if it invested in equities it could also drop in value.

2. Since I assume this lump sum is being transferred into a registered retirement account of some kind (ie. tax-sheltered), the tax treatment of dividends is irrelevant.

3. As you have indicated in your other thread, there is risk in staying with a PostMedia DB pension, because it is not as secure as a government employer. But in removing it you are transferring all the investment risk (and opportunity) to yourself. Unless you immediately transfer it into something guaranteed like an annuity. And you say you don't want to do that because you want to preserve capital for your estate. So the risk is: do you know enough about investing to manage this money prudently?


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## RedRose (Aug 2, 2011)

Oh Thank you so much again for helping me along with this. I am sincerely trying to make the best decision that I can for the best.

What if the company goes out of business? I believe I would get a smaller pension, if I get anything.

Is the bird in hand, better with the lump sum? or better with the pension as a 'guaranteed' somewhat source of income?

*MG,* I thought if I chose several top blue chip companies that pay dividends I would be set for an income stream, with no further decisions, just maybe small adjustments.

I am so very stuck on this...sigh.


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## MoneyGal (Apr 24, 2009)

RedRose said:


> *MG,* I thought if I chose several top blue chip companies that pay dividends I would be set for an income stream, with no further decisions, just maybe small adjustments.


How much time and attention do you want to pay to your investment portfolio? 

How much experience do you have in assembling, monitoring and adjusting a portfolio of dividend stocks? 

Do you know the signs you should be looking for that may signal a dividend cut? 

What proportion of your income would you be looking for from your dividend portfolio?

Do you have a financial advisor that you trust?


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## Daniel A. (Mar 20, 2011)

The loss of your spouse is sad.

Depending on your level of skill with the markets, the fact that your trying to figure out the best way forward compounded with the loss you suffered, myself I would be looking for an independent financial adviser. The cost would be well worth it. Any bank has a vested interest in the advice they offer and will be looking for your investment money. 
This may be good or it may not be.


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## RedRose (Aug 2, 2011)

Thank you Daniel for your response but I have been unable to find an independent FA. They are all attached to some company, insurance products, TD & RBC banks, selling mutual funds with high MERs and such. I even checked with Ed Jones and another insurance guy. All telling me the best decision is to take the lump sum.

If I draw the pension I have to take it monthly now and that means I will be taxed on it right away. If I take the lump sum it might grow and tax will be deferred in the RRSP.

Thank you MG, yes those decisions will be tough, for 1.25% TD have an advisor for that but with the markets taking a long time to recover I don't have the time at 63...sheesh what to do.

I am now leaning towards taking the pension monthly of $2800 a month I now receive a portion of my husbands CPP monthly, another small pension and pretty soon I will be claiming my own CPP and OAS. I am thinking one of these will just end up going to income tax? I also work a couple of days a month which I could keep indefinitely and do more work if I wanted to.

Totally confused on this matter.


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

Interesting.

My own opinion is to take the pension as a pension. That is golden. What are the chances of the company not being able to fulfill their pension obligations? Why do you feel that may happen in your case?

Please think very carefully about the questions posed in MG's last post. YOU need to take control and manage and grow the money if you take the lump sum. Based on what I'm reading here I am not convinced you have the skills needed to properly invest the money and make it grow for you. The markets have been in a slump for a very long time and I don't see things improving anytime soon. I for one would never choose to try and invest money in markets etc if I didn't have to.

Unless the chances of pension default are high, I would personally take the pension as a pension but consider stopping work so that you do not have too much income. You want the least amount of income possible, to live comfortably and pay your bills, but not so much that you end up paying too much tax.

These are all my opinions on your situation.


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## Four Pillars (Apr 5, 2009)

+1 for MoneyGal.

I don't think either choice (lump sum vs pension) is bad - but, given your situation it's hard to understand why you would want to give up a no-decision pension income stream for an investment portfolio where you will have to constantly monitor and hopefully won't get taken advantage of by financial advisors.

Keep it in the pension.

If you really don't trust the company to stay in business - then convert the pension money into an annuity.


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## RedRose (Aug 2, 2011)

Thank YOU ALL again for the great suggestions.
Isn't an annuity the same risk as the pension company? They have to stay in business also but certainly is another good option.
I calculated if I take both CPP's, my OAS, the company pension, another smaller pension I have I would have 60K a year coming in.
I feel one of the pension would be swallowed up in income tax per month.
If the lump sum goes into an RRSP it is sheltered until I am 71 or even later with a RIF I believe.
I have his life insuance just sitting in the bank earning 1.25% in a high interest savings account. I could draw on that to get me thru the next couple of years and that is tax free being life insurance.
Yes, this is quite complex.
I am reading very carefully all the responses and sincerely appreciate them.


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## Four Pillars (Apr 5, 2009)

I would suggest rereading your original thread. Lots of good info in there about the risks of company pension vs annuities.

http://canadianmoneyforum.com/showthread.php?t=8277

If the money is in an annuity, it is likely safer than with a company pension plan if the company defaults. 

Plus you don't have to put all the lump sum into one insurance company. Split it up between two or more companies.

You also don't have to put the whole lump sum into annuities.

I can't really give you direct advice - I don't know your entire financial situation, although it seems like you have adaquate funds to get by.


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## marina628 (Dec 14, 2010)

Hello Red Rose ,
I faced a similar situation as you about 4 years ago ,due to a car accident I had the option to take a monthly check until I was 60 with my insurance company or a lump Sum(mid xxx,xxx) .At first they said i had to pay income tax on the lump sum so i declined but they found a way to pay it tax free.You have had 7 months to think about this and if it is indeed tax free at 62 I believe I probably would take a lump sum as well.I am now well past 4 years of getting my lump sum and other than open a monthly statement I have not touched my principle.My investment plan was to allow it to accumulate for 10 years before having to touch it.In September 2007 the GIC Rate was higher than it is today so I am unsure what i would do with 2% interest option.I took my lump sum to protect my husband and my kids as if I didn't and I died they would get nothing.Young people die all the time ,many of the females in my family have died before they reach 70 and we have a fair amount of cancer in our family as well so based on my gene pool it made sense for me to take the lump sum. Not sure if my ramblings would help but just wanted to add my two cents


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## fraser (May 15, 2010)

Apart from the usual issues of investment risk, how secure the DB pension will be in the future, and your husbands health, I think you should be aware that taking a lump sum payment instead a monthly DB pension can actually result in a portion of the lump sum monies being taxable when they are paid to you. You should check on this. Additionally, if you take the DB pension, new tax rules will allow you transfer up to 50 percent of this DB pension to your spouse-for income tax purposes. This may result in some financial benefit for you.

If you choose to go the annuity route you may want to split the money between companies. My understanding is that annuities, like bank deposits, are guaranteed against company default but only up to a certain amount. Interest rates are quite low now so I would not think that annuity rates are very attractive.

If you seek out a financial adviser be very careful and select a fee for service adviser rather than a bank investment specialist or someone who gets paid by commissions on administering your money. Many of the latter are more concerned about earning commissions for investing your lump sum than they are about giving you good advice.


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## kcowan (Jul 1, 2010)

fraser said:


> Many of the latter are more concerned about earning commissions for investing your lump sum than they are about giving you good advice.


Take the DB pension. The amount that they owe to cover this pension will be transferred to a trust once you take it. So the risk is only about extra funding needed for COLA adjustments. If you have an average life expectancy, this will be the right financial choice. If you outlive the average, you will be a winner.


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## RedRose (Aug 2, 2011)

Thank YOU so much again. I don't know why this is causing me so much difficulty to decide.

If I take the pension my income will rise to 60K with other sources of income. I will then be forced into a higher tax bracket right?

If I take the lump sum and put into registered plan and withdraw in later years as I need it to control my annual income for tax purposes. Would this be more prudent? Lump sum should grow somewhat with small compounding in the meantime. I realize it could diminish too.

Then, I believe it has to go into a RIF at 71 and I am 62 almost 63 now.
I am still working part time and I have my husbands life insurance which is tax free to live on for the next couple of years.

I guess I am always used to having my life-partner to bounce things off to make decisions together. I am trying desperately to become independent, this is a hard lesson right now.

I am very grateful that he has provided for me and either decision is probably a good position to be in. My sincere thanks to all of you, if there is anymore to add to help me clarify this please do.


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## fraser (May 15, 2010)

As long as the employer is stable, I would take the DB in a heartbeat.


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## kcowan (Jul 1, 2010)

My Dad took his DB pension at 65 and lived to 95. He sure made out just fine.


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## MoneyGal (Apr 24, 2009)

The thing is...even if you *think* you are only going to live an "average" amount of time, you are making a pretty risky bet. Longevity is just as random as stock market returns (mathematically the dispersion around the average is pretty much identical). 

However *if* Red Rose is getting "sufficient" pensionized income from other sources (her own pension, CPP, husband's CPP) she doesn't need the additional pension income. But none of us here knows anything about her situation, really.


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## kcowan (Jul 1, 2010)

MoneyGal said:


> ...But none of us here knows anything about her situation, really.


Plus the wild card is the need for extended care. All my relatives who have died did it suddenly without an extended care.


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## RedRose (Aug 2, 2011)

Kevin,
What do you mean extended care? Is it better to have the pension to cover that or the lump sum?

Thank You All for your points of view helps me decide.


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## kcowan (Jul 1, 2010)

RedRose said:


> What do you mean extended care? Is it better to have the pension to cover that or the lump sum?


I mean the extra costs of being put in a home that has 24 hour medical service on call. Thery all died in the hospital. Extended care in the later life can be a big extra expense. Many people count on their house equity to pay for it.

(My neighbour is paying for his wife to be looked after because she has Alzheimers. She is 79.)


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## Maltese (Apr 22, 2009)

Just a few thoughts ........

Red Rose, when considering your future CPP income remember that the maximum amount you will receive will be maximum allowable for 1 person not 2. For example, if your husband's pension amount is $10,000/year and yours is $8,000/year, you won't receive $18,000/year. You will only receive $11,520 which is the CPP maximum amount receivable for 2011.

Also, don't forget about the future effects of inflation. A gross income of $60,000 today will not have the same buying power 20 or 30 years from now unless all your sources of income are indexed to inflation. I like tinkering around with these calculators when making decisions about future retirement income - https://www.retirementadvisor.ca/retadv/apps/tools/tools.jsp

Finally, heres a link that calculates income taxes http://www.ey.com/CA/en/Services/Tax/Tax-Calculators-2011-Personal-Tax
You may wish to play around with it to see how various types of income are taxed. Taxes are only one part of the equation when making your decision about what to do.

Good luck making your decision. It's great to see you taking the time to research the pros and cons of each option. No matter what you decide, you must feel comfortable with it and that it's the right decision for you.

Keith, If DB pension retirement amounts are placed in a trust when an individual retires, how is it that retired Nortel employees' pension benefits were cut when the company went under? From what I read at the time, the cuts appeared to be significant and more than future COLA increases.


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## MoneyGal (Apr 24, 2009)

If the company goes bankrupt, all bets are off.


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## carverman (Nov 8, 2010)

Maltese said:


> If DB pension retirement amounts are placed in a trust when an individual retires, *how is it that retired Nortel employees' pension benefits were cut when the company went under*? From what I read at the time, the cuts appeared to be significant and more than future COLA increases.


Being a Nortel pensioner affected by Nortel's bankruptcy and impact on it's
DB pension fund..I can provide some limited information on the current
pension fund status..which by the way is in the process of being wound up,
as the pension fund assets and current investment growth 
VS the number of pensioners drawing from it,
(and possibly any Nortel former employees-future pensioners... IF and WHEN
they qualify to draw pension benefits) is no longer SUSTAINABLE.
The Nortel pension plan stopped paying COLA in 2004, because the pension
fund was already in shortfall. 

The way it worked in the "fat years" was that Nortel CONTRIBUTED 100% 
to their DB pension fund, (which was started many years ago when the
company was known as Northern Electric and had fewer employees as
51% interest was owned by Bell, who played a major role in steering the
company in their business plan). 
This all stopped when Bell divested themselves of Nortel in the mid 90s and gave their investors a lucrative stock offering of x+1 shares of Bell stock in exchange for x stocks of Nortel. In reality it was a bit more complicated than what I am saying, but suffice to say..Bell divested their connection completely with Nortel and that is why (lucky for Bell) they were isolated and didn't get sucked into the bankruptcy vortex as the good ship "Nortel" went down for the last and final time. 

Nortel were close to serious financial problems in the late 80s, due to bad
management, but Bell, then having 51% stake in Nortel, decided to use
one of their key and competent executives (Jean M.) to take charge
of Nortel as CEO, and return them to profitabiltly...anyway..I digress..

The Nortel DB pension plan being 100% funded by Nortel from profits,
relied on company "topups" to the pension fund, to make up for any shortfalls in the pension fund, that may have arisen from the current pensioners drawing from it, and any under performance investment growth effects on the fund.

This was good in the profitable years for Nortel, when NA, Latin America,
and parts of Europe (Britain) were upgrading their old telephone networks
to modern digital switching systems. Nortel stock was flying high and the
company had a lot of cash on hand to easily top up any pension fund shortfalls, so the employees/pensioners did not have to worry.

Then in the late 90s, a Nortel engineer, who worked his way up the rank and
file got promoted to CEO replacing the Bell CEO. Shortly after Bell,
divested themselves of Nortel by cutting Nortel "loose" to guide it's own
destiny in the high tech markets. 

At first, the "change in captains" did not rock Nortel's boat, but within a few
months and years, a lot of "gunho, full steam ahead, damn the torpedos"
decisions were made due to the "hot dotCom era" when there were lots of
millionaires.. and money to be made by ALL investors..at least on paper.

Decisions in upper management were made NOT to invest money in "in house
engineering and development"... as was the case with Nortel up to now..
but instead just buy the technology they thought they THOUGHT THEY NEEDED, so it was readily available to offer to customers even sooner..but alas in most cases... there was no immediate market/need for that technology and the "dot coms" 'were overvalued" in the first place..
but Nortel didn't care..they were not about to be frugal at that point, wallowing in eager investors money to stem the competition and
make even more money..or so they thought. . (ie: Other Peoples
Money) 

No more "steady as she goes boys"...because we got uncharted waters with financial icebergs ahead". 

The cash surplus and stock valuation that Nortel enjoyed, after their financial recovery of the 80s recession..was frittered away and
all of a sudden... they had more liabilities than saleable assets!
Orders were delayed postponed to future years or just cancelled by their key customers..the ones that Nortel had relied on, for so many years. 

CUT! CUT! CUT! was the key word around Nortel at that "panic button point...but companies they had bought were not worth as much to current buyers as what Nortel had paid for them in either cash or stock swaps and the stock started to spin down, down down.
Nortel started to sell off (at fire sale 10c on the dollar prices) to anyone
that would buy these acquisitions in the "good times".

The CEO quickly retired and took out all his stock options, 
while the going was still good, and the rest of the employees/management
were left holding a bag, that was becoming more and more empty each 
time Nortel came out with a financial statement..the company was in the
RED! and scrambling to stay afloat. So much for any pension fund top ups....

Fast forward from 2000 to 2009..
by this time the "high tech darling of the TSE, was staggering like a drunken sailor who had spent his last dollar at a local bar, and was trying to find his way back to the ship in a drunken stupor! 

The CFO took over and the board approved his CEO post.
He concocted a scheme to make the books look better than they actually
were..and for the first 6 months or so, that scheme worked until the
"cat was out of the bag" that Nortel had some serious accounting errors
to correct and readjust, to bring their true financial state into the investment
light. The company could no longer offer guidance to the investment community and the stock value started to tumble...tumble..tumble..

As a last ditch attempt before their demise..the 10 for 1 stock "reverse split"..
(reclaim 10 old stocks for 1 new one, initially valued at the same price as the 10 old ones), then it was penny stock after that..no more money to contribute to any pension fund topups for 2000 or 2001 onwards..

the company with 85,000 employees worldwide once, was struggling to meet it's financial obligations, due to careless overexpansion and buying "ready made" companies they shouldn't have been buying in the first place!
They went for broke rather than keep some cash on
hand for the 7 years of famine that followed the 7 years of plenty..as the bible mentions. 

With Nortel running red ink, cooking the books, and not contributing to
their pension fund by 2009 , (just before they declared bankruptcy
protection), the pension fund was already *approaching 30% underfunding*..
and the investment climate for the DB pension fund could not make
up for the gross shortfall...so they had not choice but as of 
*August 2011 cut the pension payouts by 30% *and start the windup
of the pension plan. 

I am, now getting 30% less than before, and lost my retirement nest egg
(TRA) to the tune of over 42K that was supposed to be paid out to
me in monthly installments, from the day I went on pension to 
age 69. Out of the 136 monthly payments, 74 payments are still outstanding.

I may get 10-20c on the dollar in some form of CCAA ( Company Creditors Arrangement Act..the federal bankruptcy court) approval for distribution to the creditors..but I have lost a lot more retirement income than just my health and drug, dental and life insurance benefits.


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## kcowan (Jul 1, 2010)

carverman
When did you retire?


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## carverman (Nov 8, 2010)

kcowan said:


> carverman
> When did you retire?


I actually "retired" from work in June of 2002 with a special leave of absence because of my health issues.
I got paid a salary (because of my years of service) from June (after using
up my vacation entitlement) up until my official retirement date of Nov 2, 2003.
Nortel at that time was still in reasonable financial position to do that so I could make up the remaining few months to qualify for a larger pension benefit with 25 years of service, rather than just 23.5 yrs.

I started to draw my pension and TRA benefit on November 25, 2003.


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## RedRose (Aug 2, 2011)

WOW! You guys are amazing. I am very grateful to hear the banter as I garner more education in the financial world.

Thank you *Kevin* for your contribution.

*Maltese,* Thank you for clarifying the CPP income, yes I did have that all wrong. I may have other sources of income wrong now too. The UK pension may be cut or the Cdn to balance my income I guess too.

*Carverman,* that is a very sad review of what took place to the Nortel employess. I am so sorry that happened to you and many others.
Since that happened, I thought the Govt had brought in some legislation to cover pensions at 70%. The pension with PostMedia is a Federally protected pension from what I can gather. I guess they have some kind of watchdogs in place now to oversee pensions. Mercer would be the annuity company of this one if I take it.

*I am still stuck in Limbo.* Thank you to all that have tried to help me get out of this situation and make the best decision.


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## kcowan (Jul 1, 2010)

carverman said:


> I started to draw my pension and TRA benefit on November 25, 2003.


I would think that you are suffering from their underfunded status as of that date and not the subsequent bankruptcy?


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## MoneyGal (Apr 24, 2009)

Red Rose - I have thought about your situation quite a bit. None of us here know enough about your situation to be able to provide clear guidance. 

You may have "enough" income from pre-pensionized sources (CPP, OAS, existing pensions) to be able to live comfortably without taking your husband's DB pension from PostMedia. 

You also have expressed a desire to leave a financial legacy for your children. 

There is nothing precluding you from taking a lump sum today and then buying an annuity later, if that's what you decide to do. 

I think people here - certainly me - just want to make sure you understand the costs of giving up the DB pension. 

I worry in that it seems that you have only been talking to people who stand to benefit from you reaching one particular decision - taking the lump sum. 

In my view, you need an actual retirement income plan that will help you understand the different risks you face, how different choices will protect against those risks, and allow you to make an informed choice. In your shoes I would be looking for advice from a consulting actuary, who will 

(a) understand very clearly the particular features and benefits of your husband's pension plan, and 

(b) be able to explain whether staying with the pension is a "good deal" for you or not, by evaluating (for example) the rate of return you would need to earn on your portfolio to exceed the implicit pension return.


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## carverman (Nov 8, 2010)

RedRose said:


> *Carverman,* that is a very sad review of what took place to the Nortel employess. I am so sorry that happened to you and many others.
> Since that happened, I thought the Govt had brought in some legislation to cover pensions at 70%.


I'm not aware of any federal legislation..Harper is more concerned about his
own agenda..superjets, superjails and corporate tax cuts and killing the
long gun registry than helping out pensioners...

For Ontario Nortel pensioners there is at least some relief...the OGPF (Ontario Guaranteed Pension Fund) insurance scheme covers up to 30% of the FIRST THOUSAND of any pension registered in Ontario for any pension receipient who worked and paid taxes in Ontario. For any other provincal Nortel workers, unless that province has a similar guaranteed pension fund scheme, the pensioners are biting the bullet with a serious 30% reduction and no pension
benefits such as LTD or health/dental. 

Of course, upon windup, part of my acturized pension lumpsum, which 
WILL be DIRECTLY placed into a life insurance company annuity of some kind, will be used to repay the OGPF..so even the $300 a month kicked in by
the OPGF, is not a free gift from the Ontario gov't..
but right now, it's better than taking a huge 30% cut in pension. 

I've been lucky so far in regards to timing of all this taking place. because with my OAS kicking in this year, the OGPF kicking in about $300, that
amounts to about 15% REDUCTION in income from what I had to live on last year..so it's managable, at least so far.

Well, until the pension plan gets wound up..at that point..depending
how much the monthly annuity will give me and my health holds out..
I may still be able to live in my mortgage free home for a "few" more
years..or not.


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## carverman (Nov 8, 2010)

kcowan said:


> I would think that you are suffering from their underfunded status as of that date and not the subsequent bankruptcy?


Yes, you are correct.
The pension fund started to become underfunded when Nortel stopped
contributing topups to the plan "sometime" after 2002. 

I don't have the details on when they stopped contributing the topups, but because of their overexpansion in the late 90s, salary expenditures, staff trimming of 85K down to 25K (by the time, I left in 2002), and the compensation packages for senior executives LEAVING, as well as termination compensation package payouts to around 60K (worldwide) employees of the continuous layoff/termination spirals done at regular 3 -6 month intervals,
it was a brutal and money burning vicious cycle that drained them of
any cash reserves they still managed to have..
or from the "fire sale" capital injections on dumping all those dot com acquisitions they had made 3-4 years earlier. 

They had a lot of extraordinary expenses during those 3-4 years, ( customers delaying or even cancelling orders for new equipment)..it got so bad that they were burning money faster than it could come in..
and basically they had the appearance already of being in a death spiral after 2003, long before the US sparked recession of 2008) . 

After 2003/4 they were essentially "robbing peter to pay paul" if you know what I mean. They had dumped (worldwide) 60,000 employees from
different lines of business that they either acquired through stock/cash trades or through direct amalgamation..and the result was a lot of cash burned in a very short period..much faster than what should have happened normally, throwing the company's balance sheets way out of whack, 
with writeoffs after writeoffs after writeoffs! 

As they got deeper and deeper in red ink, their stock value (one of the best
stocks on the TSE a few years back) started to fall as the early panicked
investors "dumped" their stock holdings in order to salvage what they could.

This resulted in the stock value dropping very quickly in the space of
several months from a $90 value to penny stock status within 3 years. 

Then as more and more stock market investors divested themselves of Nortel
stock, it added to the big mess, making Nortel severely undercapitalized by around 2007. 

By the time the US recession (with the "Merri-Mac/Mini-Mae" subprime
mortgage and Wall street banking failures), the final nail was driven into Nortel's coffin.

But even before that 2008 recession hitting, most long time Nortel customers by that time were no longer placing future delivery orders through Nortel, because they already had seen (and knew about )the "writing on the wall" in regards to Nortel's desperate financial plight.
Telcos as well as other telecommunication customers rely on their suppliers for long term support..so they turned to Nortel's competitors.


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## RedRose (Aug 2, 2011)

*Oh Thank YOU MG* for thinking about my decision. I am very grateful to you for that. I think I may have found an independent financial planner that works with an acturist. I know there will be a fee involved but it may make this decision clearer to me the novice.

Thank you to All that contributed to help me see other perspectives and gain some valuable knowledge along the way.


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## Brian K (Jan 29, 2011)

I recently had to choose between taking the DB pension or the lump sum too (but my circumstances of course were diffferent than yours). One tidbit of advice that someone gave me was that taking the pension was a form of risk diversification - others were investing in things I probably would not think of -ie diversify. If I took the Lump Sum, the extra $$ I got would probably just go into my asset pool and be split into larger percentages.

I decided to take the Pension and am happy receiving my monthly pension deposits along with the income form the rest of my investments as I watch the volatility in todays market. I want to leave a legacy so I'll continue paying for life insurance (which of course I'll never see.) Also my independent, fee for service, FP recommended that I take the Pension. That confirmed my decision.


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## RedRose (Aug 2, 2011)

Thank YOU *Brian* I can see that is the best choice, if the pension/annuity company stays solvent. The Nortel story makes me nervous and doubtful.
The markets are certainly a big mess right now. Which way to turn is the 64M$ question.
My sincere thanks for sharing your choice and reasoning behind it.
I am sooooo very stuck right now and still sitting on the fence.
I feel like a de-railed train...I am trying desperately to get back on the tracks.


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## RedRose (Aug 2, 2011)

I met with an Independent FP today. 
He said my lump sum would last till I was 87yrs at a modest 4% return at $2800 a month. I cannot do the math as I think that is compounding interest.
He also told me that Mercer only check on the PM pension funds every 3yrs to see if they are funding it correctly and they just had a check up in Sept/11 seems all is well for now.

So now I have it, the Risks for both the Pension vs Lump Sum risks of investing myself.
In the Ideal world the pension would be a dream income stream if 100% secure. He did mention that the $2800 and my other income would be taxed right away in the 25% bracket.
If invested in dividend paying stocks it would be taxed more favourably at 10% I believe he said.
At 71yrs when I have to draw out of RRSPs I will pay tax on those withdrawals.
Still trying to untangle this and make my decision once and for all.


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## MoneyGal (Apr 24, 2009)

Well, if you only live to age 87 and you get a constant 4% return, you will have "enough" money (presuming you spend all the $2800/month).

But if you live longer than age 87, or you have some years of poor returns, especially early on, you run the risk of running out of money before you run out of life. 

In another thread you said you were going to keep contributing to CPP, which males me think you have a concern about generating lifetime income for yourself.

Although no one can predict the future, your chance of living to age 87 or beyond is quite high - 30% or more.

What did the planner think you should do?


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## RedRose (Aug 2, 2011)

The first one doesn't want to commit either way said its up to me.

Second one wants to charge me $225 hr and said it will take about 5 hrs to do a wealth management plan. Fee will be waived if I invest with them.

They both talk about the Nortel mishap and how that could happen as nobody knows how underfunded pensions are.

The second one prefers I invest in a mix of things especially an insurance product that will yeild, he said 5% so will guarantee $2K a month on the 480K.

It goes from bad to worse. I don't feel any closer.
On the bright side, I am feeling stronger, as earlier on I just went into panic mode everytime I had to think about the decision. I am still feeling anxious about it but a little more knowledgeable.

My sincere thanks again for your contributions.


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## MoneyGal (Apr 24, 2009)

So these really aren't independent financial planners, because they have a vested interest in the outcome of your decision. 

If they are going to argue that the pension might fail (like Nortel), why are they not also arguing that an insurance company might fail (like Confederation Life)? 

Nortel must be SUCH a boon for people selling financial products.


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## RedRose (Aug 2, 2011)

*MG,* I don't think an independent CFP exists, at least I haven't found one in my City. In the ideal world they would. Maybe I need to take a drive to Toronto...

The risk of losing the income if the Pension is underfunded, or the risk of investing the lump sum and having low returns. These seem to be the options.

The lump sum, they argue that if I become an angel in the short term, can be passed along in my estate, so at least the kids get something. The pension selection would just terminate.

This sure is proving to be a difficult decision...


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## Four Pillars (Apr 5, 2009)

RedRose said:


> *MG,* I don't think an independent CFP exists, at least I haven't found one in my City. In the ideal world they would. Maybe I need to take a drive to Toronto...


You don't need to drive anywhere. As long as the CFP is in Canada, you should be able to communicate by phone and email.

If you do come to T.O., you can meet up with MG & I for Indian food. 



RedRose said:


> *MG,*
> The risk of losing the income if the Pension is underfunded, or the risk of investing the lump sum and having low returns. These seem to be the options.


You seem to be hoping for a perfect, risk-free option. A reasonable desire, but none exists unfortunately. The goal is to choose the option, however imperfect that is best for you.

Keep in mind with the pension that it's common for any pension to be technically under or over funded at any given point of time. This doesn't mean that any part or the entirety of the pension income will be lost.

This is also true of the lump sum option - it would take some serious mistakes to lose the whole thing in a short period of time. 




RedRose said:


> The lump sum, they argue that if I become an angel in the short term, can be passed along in my estate, so at least the kids get something. The pension selection would just terminate.


I believe a financial advisor has a duty to inform a client of ramifications of taking the pension vs lump sum, but the final decision HAS to be made by the client depending on their situation. 

For some people, the lump sum is a no-brainer because they want to leave as much as possible in their estate. For others, they need the money to live (either from a lump sum or pension income) and the estate is secondary. 

You have to decide how important it is to leave any remaining money from the lump sum, if that's the way you go. If you take the pension option and die the next day - will your estate be zero?



RedRose said:


> This sure is proving to be a difficult decision...


It certainly is not an easy one.

1) Don't think about it as being a right or wrong decision ie one option is good and the other option will be a disaster. The reality is that either option is likely to turn out reasonably well.

2) One of the reasons some of the posters to this thread (including myself) are leaning towards you taking the pension is not because we necessarily think that the pension will yield more money, it's mainly because the lump sum investment will involve future investing decisions. You don't seem to have much experience with investing and that might cause you a lot of future stress.

This Globe & Mail financial facelift article reminded me of you.

http://www.theglobeandmail.com/glob...ust-decide-which-door-to-take/article2266162/

The advisor concluded that although by his calculations (and assumptions which may or may not be correct), the person would be better off taking the lump sum - in the end he recommends taking the pension.



> After talking to Mark, Mr. Home recommends he take the monthly pension because it is more in keeping with his conservative approach to investing.


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## RedRose (Aug 2, 2011)

*OMG Mike,* Thank YOU so much for discecting and analysing this problem for me. I am so very grateful to you for this and the most relevant article. 

I am comforted by your statement that niether choice is a disaster. When your mind is not functioning at it's normal capacity, as mine has been these past few months, things do tend to look like disasters waiting to happen.
The anxiety and uneasiness to make this decision has been the worst I have had to face while trying to grapple with his death.

YOU have all been a Godsend to me. You have my sincere appreciation. 
I am now taking the time to read and comprehend every part of your reply and the article to help me formulate the wisest option.


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## RedRose (Aug 2, 2011)

*Hi All,* I have been reading and re-reading these replies until they make sense. In the early days when I was full of questions, I was so full of anxiety that I could not comprehend even the simplest of replies.

*Kevin wrote:*


> Take the DB pension. The amount that they owe to cover this pension *will be transferred to a trust* once you take it. So the risk is only about extra funding needed for COLA adjustments. If you have an average life expectancy, this will be the right financial choice. If you outlive the average, you will be a winner.


*Kevin:* Who are the trust? Are they Insurance companies?

*MG:* Your quote of *'All bets are off if the company goes bankrupt,' *is what scares me about taking the DBP.

I see the annuity with Insurance companies would be the least risky, as many have said here.
The sunlife guy said this would pay me 2600 a month for life if I invest the lump sum with him. (least risky right?)

This would be fairly close to the 2800 PostMedia would pay. I get no COLA with the DB or Health Benefits etc... but might be okay if trust is secure right?

I finally feel like I am finally grasping this now. Thank you all for your patience.


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## MoneyGal (Apr 24, 2009)

Least risky: *It depends* by what he means by "annuity." 

Is this a single premium immediate annuity (you pay once and income starts right away)? Does it have any "riders" or guarantees? 

Or is a "guaranteed minimum withdrawal benefit" product that pays 5% of a lump sum deposit? 

In either case, with Assuris, you are protected up to $2000 in monthly income. 

Also - in none of those cases (that I just outlined) do you get inflation protection. How will you address rising costs?


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## RedRose (Aug 2, 2011)

*MG:* Thank you again for a prompt response. I will ask those questions tomorrow. I am not sure but I think it is the second one you mentioned.



> Or is a "guaranteed minimum withdrawal benefit" product that pays 5% of a lump sum deposit?


For inflation I'm not sure how I would cover that, as I don't have any indexing with either the DBP or the Guaranteed Annuity.
I would have CPP, OAS, and UK small Pension as other income, not a huge amount but would cover most of the house expenses, taxes utilities and such.
I do have the RRSPs so I could invest those to top up or reduce my cost of living expenditures as I got older. I probably would'nt need as much gas for the car or clothes and such.
Not sure how I would cover inflation cost? What do other people do?
Thank you for getting me to think of these things.


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## RedRose (Aug 2, 2011)

Here are some answers from the insurance guy:-
thank you for asking these *MG*

Is this a single premium immediate annuity (you pay once and income starts right away)? Does it have any "riders" or guarantees? 

Yes it is an immediate annuity and will begin payments as soon as it isset up. The monthly income will depend on the options taken. The more guarantees and riders added will reduce the monthly amount.

The nearest annuity option comparable to the Pension Plan does not have any guarantees or riders. "guaranteed minimum withdrawal benefit" product that pays 5% of a lump sum deposit? This option is not an annuity, but a segregated investment fund that will guarantee a 5% income stream for life. If the investment market goes up invalue, the 5% will also go up hence offering some inflation protection. But if the market goes down there is always a guarantee of 5% on the original amount. 

do you get inflation protection. How will you address rising costs? The annuity option does allow inflation protection if you choose an inflation rider ( this does reduce the monthly annuity payment) The guaranteed minimum withdrawal benefit does have inflation protection with a rising market value. 

I will check with PM if the pension funds are put into a Trust or if there is any guarantee with the DB pension. I didn't know about the Trust part that *Kevin* Cowan mentioned. Thank you ALL again.


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## MoneyGal (Apr 24, 2009)

RedRose said:


> The guaranteed minimum withdrawal benefit does have inflation protection with a rising market value.


I have an issue with this statement. I do understand that stock market exposure provides a hedge against inflation. But it is not appropriate to suggest that a GMWB provides inflation protection directly - as in the quote above. 

To be clear, I personally think that stock market exposure is an appropriate hedge for inflation. But I think the language, above, is inappropriate, because it is misleading. IF stock markets rise, and the step-up in the GMWB is activated, then the client's income may rise as her costs rise. If costs rise and stock markets do not rise, then there is no inflation protection. 

Here is a very math-y explanation of the probabilities of a GMWB "step-up" using historical market data and providing two cases: one in which the client has invested aggressively, the other in which the client has invested conservatively. 

http://www.qwema.ca/wordpress/wp-content/uploads/2011/02/QWeMA-Newsletter-Feb2011.pdf

What you can see is that, if the historical data chosen is a guide, a client adopting the most aggressive asset allocation in a GWMB product has (at best) about a 4-in-10 chance that the income base will be re-set to provide increased income and a hedge against inflation. 

(RedRose, I apologize that this information is so complex, but I am committed that people discuss these products in meaningful and accurate ways.)


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## kcowan (Jul 1, 2010)

In my case, the DB pension is administered by RBC-Dexia, and the funds were transferred upon my retirement. If you recall, Dexia went bankrupt this year but RBC bought their Canadian operations. Whew.

The company is taking all measures it can to delay top-ups to the trust but the original company remains financially sound after 19 years (I retired early). And I think RBC is safer than most insurance companies. Ask what trust your company is using for their DBP.

So from my experience, the DBP was the way to go. I am able to relax more on my portfolio, knowing that DBP, CPP and now OAS are all "guaranteed". I even have some mining companies and have made 3 10-baggers and a few 5 baggers.

Keith
(Edit for RedRose: a 10-bagger is a stock that increases tenfold in price.)


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## RedRose (Aug 2, 2011)

This is the answer I received from Post media.

(Right now, all your pension payment will go through our trustee RBC Dexia.)

Seems we are on the same page *Kevin.* thank you for sharing that info about your pension trustee with me. I had no idea about that part.
What are baggers? not too familiar with the lingo.

*MG:* Thank YOU so much again. This will take some careful deciphering again.
I will have to print it off to read over and then re-read with a highlighter to actually 'get it.' Sorry this is how my brain is working right now.

Today I am leaning towards taking the PM pension, not sure if they will back- date the past 8 months or not and it could take them a while to get it all up and running. Will see if I wake up tomorrow with the same choice. Sheesh!


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## MoneyGal (Apr 24, 2009)

Here is an article from Milevksy on "When should workers take a lump sum?" 

http://in.reuters.com/article/2012/05/03/column-miller-pensions-idINL1E8G3DJU20120503

Excerpt:

Milevsky cautions that there's no one-size-fits all answer.

"But my default position is not to take the lump sum and I therefore have to be convinced to give up the pension annuity. Not the other way around," he says.

"In most cases, the lump sum won't compensate for loss of the pension, unless you're in poor health and don't expect to live very long."

In deciding whether a lump sum is a good deal, *Milevsky advises retirees to consider three key factors*:

*Mortality*. "How healthy do you think you are in relation to the rest of the population? If you have reason to think you'll live longer than average, the pension probably beats a lump sum."

*Interest rates*. The lump sum is a good deal only if you are very certain you can beat the rate of return (referred to by the numbers folks as the "discount rate") that your pension plan is using to calculate what your pension is worth as a lump sum.

"We're in a very low rate environment, so that makes the pension worth more," says Milevsky.

By law, the lump sum calculation is pegged to yields on corporate bonds. The rates vary depending on your age and are adjusted monthly by the Internal Revenue Service. The published rate for March for a 65-year-old is about 4.25 percent, according to Ellen Kleinstuber, a principal with Savitz Organization, an actuarial consulting firm. For that retiree, the choice would be between receiving $700 per month lifetime, or approximately $108,000 as a lump sum.

That means, in order to come out ahead, you'd need to be able to beat that 4.25 percent rate investing the lump sum. That's impossible to do if the money is invested in risk-free investments, such as certificates of deposit. You could choose to assume a higher rate of return from investing in equities, but the risk must be factored in, Milevsky cautions.

*The amount you're getting*. "How much is your employer actually proposing to give you? If it's a trivial sum, take the lump sum," Milevsky says. "If it's a large amount, you need to run the numbers."


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## RedRose (Aug 2, 2011)

Thank YOU again MG. This is another great article.
I am now a little better focused than I was this past year and I am beginning to grasp things more.
I have contacted an independent actuary and he is beginning to look things over for me.
Thanks again for all your assistance, everyone here has been very supportive and I greatly appreciate all the advice.


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## DRAN (Sep 20, 2012)

*Dran*

This is as much and emotional decision as it is a financial. I am scared by the comment that most advisors you talk to tell you to take the pension. Questions that need to be asked:

1) is the current pension a Defined Benefit plan or Defined Contribution? The answer determines a couple of factors like is the pension income indexed to inflation? No matter what people may promise it is very hard to match an indexed defined benefit pension for monthly income over the long term.
2) Is the pension federally regulated or provincially regulated because there is a difference in the planning opportunities if access to a lump sum of money is needed at some point.
3)What does the surviving spouse receive on death in both arrangements?
4) Are there health benefits attached if you stay with the pension and lose if you take the pension out?
5)What rate of return do you require to match the pension? 
6) How important is leaving a legacy to children or grandchildren......(this is the emotional part!) :encouragement:

Lots to think about for sure......you may end up that the right decision for you is to take the pension out but finding an advisor that will give you the right advice is crucial!!


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