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Pensions: To Commute or Not Commute? That Is The Question.

If you’re lucky enough to have a company pension – something few of us can claim to own – then you may already be aware of the options you have when you decide to leave your employer.  Whether you leave your employer at retirement or you terminate your employment for other reasons, if you have been paying into a company pension there are some choices you may be faced with.

Do you take a lump sum payment or a monthly payment?  Firstly, it’s important to keep in mind that every pension has its own set of rules and is subject to provincial or federal regulations, which determine when or if an employee is able to take the lump sum.  Equally important is that taxes are extremely high when commuting a pension of a high value.  While a large portion can be transferred tax free to a Locked In Retirement Account (LIRA) it is still advisable to do your homework before making a decision on whether to commute or not commute the value of your pension.

WEALTHplan has put together a list of 6 things to keep in mind when deciding to commute or not commute your pension:

 

  1. SHORT TERM INTEREST RATES:

Taking the lump sum, or commuted value, looks even more attractive when short-term interest rates and bond yields are low, as they are now. The lower they are, the higher the payout will be. However, a large portion of the lump sum pay out will be taken by taxes in the year of receipt. While a large portion can be transferred tax free to a locked in retirement account it is best to go over the numbers with a certified financial planner specializing in tax who will be able to advise you and tell you exactly what you will be left with.

  1. INVESTING YOUR LEFTOVER PORTION:

Along with your financial planner you can take the left over portion that is taxable and invest it into an RRSP.  The thinking here is that if you’ve taken the lump sum payout you are most likely between the ages of 50 and 55 – when most pensions are available for commuting to employees. If you’re planning on working somewhere else or have other income available to you it makes the most sense to invest the commuted value of your pension into an RRSP until you take full retirement.

  1. LOCKED IN RETIREMENT ACCOUNT:

Despite the downsides of commuting your pension (you need to take it by a certain age & the amount that is taxed) you may feel you’d rather invest your pension on your own or with your financial planner. A Locked-In Retirement Account (LIRA) is an option that is appealing because it gives you investment choices and the money is held there until retirement.

  1. OTHER LIFE CHANGING DECISIONS:

Sometimes the decision to take the commuted value of your pension goes beyond tax and investment considerations.  You may decide you want to leave some sort of legacy income for your spouse or kids that is guaranteed.  Or you’ve decided to leave your employment, take your commuted pension and pay down your mortgage. The temptation to become debt-free is enticing and the opportunity of the lump sum payout is an option that some employees want to consider.

  1. AT WHAT AGE CAN YOU COMMUTE YOUR PENSION?

Most often than not, employees with pension plans are not aware of the restrictions associated with their pensions.  The decision to retire early and take the lump sum value by age 50 or 55 is not a decision to be made months before the deadline date.  Employees should be aware of their options years before their early retirement date comes up to be prepared to make a proper decision when the time arrives.

6. DO YOUR RESEARCH AND SPEAK WITH A FINANCIAL PLANNER

Lastly, the temptation to take a large sum of money that is available to you is tempting. Do your research by speaking with your Human Resources Department regarding any restrictions associated with commuting your pension.  Once you have all the facts go over the numbers with your financial planner who will set forth a plan based on your goals and objectives.