We are often asked by a client if they should take the commuted value of their defined benefit pension plan or keep it in place.
This question cannot be answered easily. There are many things to consider. Can an individual plan be created that will promise the same or better guaranteed income? Is the client giving up a retiree benefits package? Will the client’s spouse be affected by the decision? And so on.
If we stick to numbers, most commuted values from a defined benefit plan are composed of two components: an amount that can be transferred to LIRA or LIF; and a non-registered component. The table attached from the CRA is used to determine the locked-in amount and the non-registered amount.
Let’s consider an example:
A client age 58 is contemplating commuting their pension. They tell you the pension income is $40,000 annually. Then using the factor from the table, we see for a 58 year old, the factor is 11. Therefore, 11 x $40,000 or $440,000 is the maximum amount that can be transferred to a LIRA. If the commuted value is $500,000, then $60,000 would be non-registered and added to the client’s income in the year the pension was commuted.
Therefore, one consideration regarding commuting the pension is can the LIRA amount plus the after-tax non-registered amount be invested in such a way as to provide the same or more income than the pension promised?
There are certainly other considerations, but this is a good starting point.
As always, I look forward to your comments.
Director of Wealth
Qualified Financial Services
416 786 4140