Originally published in the Global News – Make The Most of Your Money 123 Newsletter, written by Nancy Grouni, September 18, 2020.
– THE QUESTION –
“I am currently 54 and hoping to retire at 55. I’m blessed with a defined-benefit pension that offers retirement at 30 years service with 60 per cent of pension payments at any age before 60. For me that is about $4,300 a month for the ages of 55 to 60.
Starting at age 60, the pension payment ‘pops up’ to the normal pension amount, which would be about $5,400 a month. Starting at 65, that would become $6,400 for me, including Old Age Security (OAS) and Canada Pension Plan (CPP) amounts. Using savings in my Registered Retirement Savings Plan (RRSP), I will be able to top up my ‘reduced’ pension amount to have $6,400 per month. And I’ll still have funds remaining if needed.
However, I could also take the commuted value of my pension instead. If I were to take it in December, it would be $1.4 million. I only have $63,000 in RRSP room available as a tax shelter.
My wife has no retirement pension so we would only have my retirement options as income.
What are some of the pros and cons of taking the defined-benefit pension vs. its commuted value? What is the possibility of the commuted value calculation being reduced and by roughly how much due to the Canadian Institute of Actuaries’ use of new actuarial standards?”
— A Money123 reader (the question was lightly edited for clarity and length)
“Whether to choose a monthly pension payment for life versus a commuted value lump sum payment to invest is not a decision to be taken lightly. There are a number of issues at play, like investment risk tolerance and life expectancy.
A conservative investor will have a tougher time investing a lump sum and generating more retirement income than their pension payments. A pensioner with a long life expectancy may be better protected by a pension than a lump sum payment. There may also be tax implications to consider from a commuted value payment.
There isn’t a one-size-fits-all answer and personal factors – both financial and non-financial – should be considered.
Also, effective Aug. 1, the Canadian Institute of Actuaries made changes to the way they calculate commuted value payments. Key changes relate to the interest rate and pension commencement age assumptions. Commuted values paid out using the new assumptions may be lower than the commuted values using the prescribed assumptions under the previous standards.
That said, on the whole, keep in mind that the low-interest environment means a higher commuted value payout compared to a higher interest rate environment. This is because pension payouts and interest rates have an inverse relationship – low rates mean a higher payout. You receive a larger lump sum when interest rates are low, but then you also need to try to invest the money in a low-rate environment as well.”
— Nancy Grouni, CFP, Objective Financial Partners
