Commuted Values Explained | Pension Plan Termination Selection Statement
Today we will cover Commuted Values of a Pension Plan.
What is it?
When to take it?
Tips and Tricks to make the most informed decision.
If you have every left an employer with a Defined Benefit plan before age 55 (sometimes later) then you would have received something called 'Termination Selection Statement'.
This statement gives you options on what you want to do with your pension. The first and default option is to take a monthly pension when you reach 55, which usually reduces at age 65 (bridge drops off).
The second option will be a commuted value. This is a lump sum paid to you in lieu of a set pension income amount. The commuted value option will be broken down into 2 parts:
1. Portion to move to a locked in retirement savings vehicle
2. Cash payment - which can be invested to a RRSP if you have the contribution room.
Hire a professional to crunch the numbers for you, but also take into consideration a few other factors:
1. If you are not married, how does the survivor benefit work? You may lose out on a lot if you die early with no spouse. Your kid(s) could potentially lose our on millions of dollars.
We had a client with a teenage son and was worried that if he took the pension option and dies early, his son would be left with nothing. He ended up taking the commuted value for many reasons, one of them being to protect the asset for his son.
2. Can you defer other income sources to offset any income tax liability from the cash payment portion.
We had a client that now owned a business that could leave the income he usually takes in his corp until the following year and live off the cash payment. This kept his income taxes low for the year and the overall plan still met his retirement needs.
3. If you have a lot of RRSP contribution room, then the commuted value could make even more sense as you can shelter the tax liability with a large RRSP purchase.
There are key factors that should be calculated into if you take the commuted value, which we will cover in the video.
If you are looking for a Financial Planner to help you determine if the commuted value is right for you, a full breakdown should cost between $500 - $1000.
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Пікірлер: 15
Very informative. Thank you, Adam.
Great video
Is there a way to estimate the taxable part of a commuted value? Understanding that the total amount is a function of expected monthly benefit and interest rates at the time, it would be good to know how much RRSP room someone might want to keep available if they thought they might opt for commuted value in the future. And thanks for the great content!
Very well explained
@ParallelWealth
3 жыл бұрын
Thank you!
I was let go from seasonal employment with only 7,800 in RPP. I was wondering if withdrawing the funds to have it in my possession is a good idea?
Thanks for your videos, Adam. I learned so much from them. What I don't like about taking the CV is that it's almost certainly lower than the contributions made to the plan. Taking pension payments on the other hand, I will have to live up to my late 70s just to breakeven and only see profit in my 80s. Also, pension payments are only guaranteed for 5 years so my beneficiaries won't get a dime after that. Seems like the odds of enjoying in some profit or at least getting my money back is slim to none. Pension contributions aren't cheap either. 😒
@ParallelWealth
3 жыл бұрын
All pensions have different options, often will have up to 15 year guarantee payments or a survivor payment.
@archibaldsangrador1931
3 жыл бұрын
@@ParallelWealth Yes, the pension has an option for 15 years guaranteed for single but only 5 years for joint. I have an RRSP which I have contributed in for only 4.5 years with employer matching from my previous job. By my projections, I'd most likely get a higher income from my RRSP versus my pension after I'd have contributed to it for 20+ years. Also I'm contributing more $ (almost 2x more) to the pension versus my RRSP back then. In short RRSP (4.5 years of contribution) beats Pension (20+ years of contribution). It seems to me like my pension plan is like a piggy bank with a hole at the bottom. It would be great if you can make a video comparing pension versus RRSP with some numbers crunching showing which is better. I'd appreciate it, thanks!
Is Ontario PP CV available up to age 65?
@ParallelWealth
2 жыл бұрын
Every DB pension is different. You would have to check with yours directly.
I don't know what Alberta teacher pension plan is doing but my commuted value currently in 2021 is going backwards. It's less than last year and my income is the same. Not sure if it has something to do with the drama from the government who tried to transfer the money to a different management company earlier. The mess up part is your monthly pension estimate is the same value. Not sure how many teachers know about the commuted value. Something fishy is going on.
@ParallelWealth
2 жыл бұрын
Yes, commuted values have dropped a fair amount the past year. Look at 30 year bond rates as a guide.
With HOOPP, if a single person dies 5 years after receiving the pension, the beneficiary ( eg. son) will receive the remaining pension for 10 years. It has a guaranteed payment of 15 years. Would you still advise this person to withdraw the commuted value of the pension?To save on taxes, you are advising to transfer it to RRSP. But isn’t it that if a single person dies, the rsp is considered as income on the year of death which means in this case it is taxed at a hefty 50%?
@ParallelWealth
2 жыл бұрын
Usually pensions have a 5-15 year guarantee in case of early death. In that case I have never seen a commuted value once payments starts. Could be possible, but never come across it. As for second question - run the math, yes it's taxed but still lump in beneficiaries hands versus just a few more years of payments.