On December 1st, new rules are coming into effect regarding the calculation of pension commuted values. In a nutshell, commuted values could be reduced between 4% and 7%.
The Society of Actuaries has recommended using a new interest rate in the calculation that is derived from government, provincial and corporate bonds. So, in all likelihood, the interest rate will be greater than the current prescribed 7-year CANSIM rate. This means lower present values.
Also, the calculation will use an averaging of the earliest unreduced pension amount and the planned pension amount as the amount to be discounted.
Given a higher discount rate and average pension amount, we get to the estimate of commuted values being 4% to 7% lower than current amounts.
Here is a good article on the subject for your review.
A word of caution, always be able to justify why a client chose to commute their pension. Reasons may include, survivor’s benefits, control of investments, demonstratable higher future income if commuted, survivability of the pension plan itself, and so on. Regarding the last point, ask your client if they think their current employer (or successor company owners) will be around when they are 90 years old. If not, this fact can help influence the commutation decision.
We look forward to your thoughts.
Scott Edgington
Regional Manager, Wealth, Ontario
Qualified Financial Services
Rick Gallant
Regional Manager, Wealth, Atlantic Canada and Quebec
Qualified Financial Services
This communication reflects the views of Qualified Financial Services Inc. as of the date published. The information in this publication is for general information purposes only and is not to be construed as providing individual legal, tax, financial or other professional advice. Qualified Financial Services Inc. assumes no responsibility for any errors or omissions in the information contained herein nor for any reliance placed on such information. Please seek independent professional advice before making any decisions.
