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3 Personality Traits and DB Pension Plan Commuted Values

January 7, 2022

When an individual makes the decision to take the Commuted Value of their Defined Benefit Pension Plan, they have decided to have a plan which pays themselves an amount equal to the guaranteed monthly payment they would have received from staying in the plan. This is HUGH undertaking with many possible benefits, but definitely not suitable for the following personality types:

 

The Big Spender: This individual likes spending money and may not have always been the best saver. A Commuted DBPP value could mean 1 - 3 million dollars instantly in your own investment accounts. EASY ACCESS and easy to make large withdrawals.

 

The Gambler: Any gambling or risk-taking characteristics are a definite negative.

 

The Lottery Player: A Commuted DBPP value could be treated like winning the lottery, and EASY COME, EASY GO!

 

We carefully review all investment scenarios and individual risks when discussing Commuted values. Taking the Commuted DBPP value could be a very good strategy for one individual and not advised for the next individual.

Thank you and Enjoy your day.


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Why not use your RRSP contribution to fund your TFSA?

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Several times a year, over the past 14 years, I have read articles suggesting advice about RRSP and TFSA contributions. Conflicting Information When I read these articles they seem to advocate that you contribute to your TFSA first, or only to your TFSA, or that you contribute to your RRSP first and then maybe your TFSA later, or vice versa. I find this all pretty confusing and certainly feel that it does not help toward making a decision. You might agree. Why Not Use Both Plans? Anyone with taxable income and some savings at the end of any year and is 18 years of age or older (age required for a TFSA), should have some amount of RRSP contribution room (unless of course they are part of a fully funded pension plan with no excess RRSP contributions available). Let’s pick a young wage earner with $5,000 of RRSP contribution room available. They have worked hard and managed to save $5,000. They decide to contribute this to their RRSP. We will assume they are paying 30% marginal tax and therefore are eligible for a $1,500 refund (or tax credit) from Canada Revenue Agency. Next because they are a strong saver, they contribute this $1,500 refund to their TFSA. If we pick any rate of return: 4%, 5%, or 6%, and we make our RRSP and TFSA contributions year in and year out, for 20 years, the compound results will be significant in both plans. Our saver/investor has benefited from using both plans, with help from our good friends at the CRA. When we look at the discussion from this perspective, why would we not take advantage of both registered savings programs? I think any arguments about tax now and tax in the future should be muted, when we see the substantial retirement savings in both registered accounts, even if we use a guaranteed return of only 4%. The TFSA still retains all of its withdrawal attributes and as our saver earns and saves more, they can fully contribute to both plans.

What does a Commuted Value Pension look like after taxes are paid?

March 2, 2022
When a Defined Benefit Pension Plan (DBPP) is commuted, there will always be a required tax payment. The reason for taxes is because a lump sum is withdrawn from the plan and paid out as income. These are often large tax payments, depending on the overall commuted value, and need to be considered with all other components. Here is an illustration based on an actual Commuted Pension after withdrawing from a major corporation’s DBPP. Client was 50 years of age and had worked for the company for 30 years. The most favorable pension payments were an immediate payment of $8500/month ($5400 after tax) with a 15-year guarantee. Or, $10000/month ($6800 after taxes) at age 60, with a 60% survivor guarantee. The Commuted Value $900,000 transferred to a LIRA. $1,600,000 lump sum taxable payment $550,000 taxable severance (about 2.5 years) $100,000 taxable cash from future performance grants After withdrawing $150,000 for 2 years living expenses, paying all taxes, topping up RRSP and TFSA contributions, the client added $2,200,000 to their existing investment portfolio. We determined the client needed an average annual rate of 3% - 4% to provide a payment comparable to their pension. Most importantly, many factors and individual circumstances need to be considered when deciding to receive a pension payment or take a commuted value. Actual dollar values were adjusted and rounded for ease of illustration.  Thank you and Enjoy your Day. James Whitehouse
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