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Which Pension Option is Best for Me?


Good news! As part of the many years devoted to your employer, you have accumulated a substantial defined benefit pension. The downside? As you prepare for retirement, you are presented with a document, which outlines multiple, and sometimes confusing, options regarding your pension. Should you leave your pension with your employer and benefit from a monthly, predetermined amount or transfer the lump sum commuted value to the financial institution of your choice? If you choose to benefit from your pension, which option is best for you? Are you leaving money on the table by choosing one versus another? Maybe.

The decision around selecting the best option for you does not need to be a complex one. However, it does require that you dedicate time to analyzing each option and conducting some basic due diligence on your employer and their ability to continue to fund the plan in the future. The first step in this process entails reviewing the provided document and finding out the date by which you must make your decision. Many pension plans will automatically pay the lifetime pension to a member as a default option when no instructions are received by their deadline. As this is an important and irreversible decision, make sure you do not leave it to last minute.

With the deadline to submit your pension instructions in mind, you are then presented with two tasks:

  1. Determine – mathematically – whether it is best to benefit from the monthly pension or to transfer the lump sum commuted value; and
  2. Consider other qualitative factors in making that decision. For example, do you find comfort in knowing that you will receive a monthly pension for life? If so, you might value that versus having to invest the commuted value and bear the risk of producing a positive return annually.

The Mathematical Analysis

Although it might sound complicated, the mathematical analysis is actually quite simple. It involves a side-by-side comparison between the annual stream of income you expect to receive from your pension (including indexing if your pension provides for it) versus the annual income you can expect from your investment account after you have transferred the commuted value and invested the funds at a conservative rate of return. The option that provides the highest annual income throughout your retirement is the better option.

For example, Sally Smith is 41 years old and is leaving her employer. She has the option to stay in the pension plan or take the commuted value of $830,647. Her base pension amount is estimated to be $34,957 per year starting at age 60 with a bridge amount payable to age 65 of $2,527 per year (indexed to inflation).


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This has been prepared by Raymond James’ Retirement & Financial Planning Department and expresses the opinions of the author and not necessarily those of Raymond James Ltd. (RJL). Statistics and factual data and other information in this presentation are from sources RJL believes to be reliable but their accuracy cannot be guaranteed. It is for information purposes only. Securities-related products and services are offered through Raymond James Ltd., member - Canadian Investor Protection Fund. Insurance products and services are offered through Raymond James Financial Planning Ltd., which is not a member - Canadian Investor Protection Fund.