If your employment ends in a position that includes membership in a defined-benefit pension plan, you will usually face an important decision: whether to collect a monthly pension or withdraw a lump-sum “commuted value” (CV) payment. While a pension can offer income for life, sometimes taking a CV is preferable. For example, the market risks of investing the CV may seem worth the additional income and estate wealth preservation opportunities you and your family might gain.
A CV is calculated by pension administrators when employment ends or at a later date, by request. Since CV estimates are only valid for a specified time, after which the value is recalculated using new assumptions, future CVs may decrease or increase. Your ability to receive a CV may even be removed; for example, if you reach the pension plan’s retirement age or if paying a CV would impair the solvency of the pension plan.
It is important to note that two recent measures could impact present or future CV choices.
Measure #1: CV restrictions announced by some pension regulators
Several regulators have recently announced measures to relieve financial pressure on pension plans in the wake of COVID-19 market turbulence. BC, Alberta, Manitoba, Ontario and Quebec regulators have each reminded pension administrators to restrict transfers when appropriate (e.g., if plan values decline and/or paying the CV would impair a plan’s solvency). Federal and Saskatchewan plans have placed certain moratoriums on CV transfers.
Measure #2: Calculation changes effective December 1, 2020
Calculating a pension CV requires a plan to make several assumptions, including one for long-term interest rates. This key assumption has an inverse relationship with the CV. On December 1, 2020, this long-term interest rate assumption will pivot from being based on Government of Canada bond rates to one that blends corporate and provincial bonds. An increase in this rate would result in a lower CV, and vice versa. Plans offering early retirement benefits that are more generous than if actuarially reduced may also change their retirement age assumptions on this date.
While a well-funded pension plan can be an important source of retirement income security, pension plans are not immune to economic challenges that could constrain your future pension choices. With low interest rates currently boosting CV amounts available, your pension CV may be worth a second look.
There is no one-size-fits-all solution. In conjunction with information and advice from a pension actuary and your income tax professional, a member of Odlum Brown Financial Services Limited may help with making your decision. You will want to consider:
- income tax that may be payable on any CV “excess” portion not transferable to your regular or locked-in RRSP;
- annual restrictions on withdrawals from locked-in funds; and/or
- pension income credit and pension income-splitting restrictions, if the CV option is chosen.
Since pension plans may need weeks or months to prepare your CV options, contacting your pension plan administrator well in advance can grant you sufficient time to weigh your options.
For information about investing a CV and the products and services offered by Odlum Brown Financial Services Limited, please contact us through your Odlum Brown Investment Advisor or Portfolio Manager.
Odlum Brown Financial Services Limited is a wholly owned subsidiary of Odlum Brown Limited, offering life insurance products, retirement, estate and financial planning exclusively to Odlum Brown clients.