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To commute or not commute your pension?

Whether you are retiring, starting a new job or taking time off, leaving an employer can often be an emotional time. Financial concerns and the need to make some important decisions, such as what to do with your pension, may add to your stress level.


If you have been a member of a pension plan for many years, the benefits that you have earned in the plan could likely be the largest source of income you will receive in retirement. Deciding what to do with this income involves many variables and can be quite confusing. And, once you make a decision, it is often irreversible.

To learn more about the options and how to approach this decision I sat down with Dan Sexsmith, Investment Advisor at RBC Dominion Securities in downtown Toronto. Here are some of the questions I asked him:

If I have just left my employer, what’s the first thing that is going to happen?

“Prior to or shortly after you have terminated employment, your employer should send you a written summary outlining your company pension plan options. You will be required to select one of the options by a specific deadline and if you don’t act before the deadline, your employer may consider that you have chosen one of the options by default, which may or may not be the best one for you.”

And I then added, what options are usually offered?

According to Sexsmith, “there are usually four basic options to select from. Firstly, you can decide to stay in the pension and receive your accrued benefits at retirement age. Secondly, you may opt to purchase an annuity that pays you a set cash flow at a predetermined date in the future. Third, you should have an option to ‘commute’ your pension amount to a locked-in retirement account (LIRA). Once in this account you control how the investments are managed. And lastly, if available, you can request to transfer your pension amount to another employer pension plan and participate in that plan.”

What are some of the reasons that you may decide to keep your retirement funds with the pension?

Sexsmith believes that the number one reason to stay in a pension is the high degree of certainty of what you will get in retirement. The employer takes on all the investment risk and the benefit paid is predetermined and sustainable. This decision may not be so straight forward if the company is under financial strain and pension funding is at risk.

He added “the next item that I come across is not a financial factor rather it’s related to benefits coverage such as medical and dental. Some employers continue to offer full benefits if you remain with the pension. This is a benefit that you should not overlook when making the decision to commute your pension. One course of action that eliminates this is if you have a partner that can add you to their benefits plan.”

What are some of the reasons that you may decide to commute your retirement funds to a LIRA?

“Getting control is the biggest motivator. When you are in your retirement years you have greater control of how you use your savings. This is further enhanced when you consider special ‘unlocking provisions’ that allow you to roll funds from your LIRA to your regular RSP account. Again this means more control.

"Lump sum withdrawals are not possible when in a defined benefit pension plan but in a LIRA it is (within certain limits). On the other hand you can decide to take less in a given period to manage around government benefits that have claw backs such as Old Age Security.

"Considering your family and their dependency on your income is another big area to assess. If you pass away prematurely the benefits paid from your pension will be cut by up to 40% for your surviving partner. With a LIRA you are able to roll the funds into the surviving partner’s RRSP with no tax consequences.

"This last item I would note is that if you do decide to move your funds to a LIRA you take on the risk of running out of money in retirement. To partly address this you can allocate some funds to specialty insurance products that offer income for life. It’s like buying a mini-pension that creates a minimum floor on your retirement income.”

Lastly I asked, what is your advice for approaching this decision?

He explained that the first step is to get an advisor involved that has access to pension calculation tools and explore the scenarios. The decision involves many complex variables and the details can be overwhelming without the proper tools. Looking at scenarios and understanding the risks of each decision will be the best way to make your decision.

Dealing with pension decisions has long-term implications. Get a professional involved and assess your options. Can you afford not to?


Mark Borkowski is president of Mercantile Mergers & Acquisitions Corporation. Mercantile specializes in the brokering the purchase or sale of mid market companies.
www.mercantilemergersacquisitions.com


This information is not investment advice and should be used only in conjunction with a discussion with your Investment Advisor. Dan Sexsmith is an Investment Advisor with RBC Dominion Securities Inc. Member-Canadian Investor Protection Fund.
www.dansexsmith.com


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