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How Do I Calculate What My Pension’s Commuted Value Is?

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Commuted values (CVs) must be calculated in accordance with the Canadian Institute of Actuaries’ standards (the CV Standards).

In general, your pension’s commuted value is the lump-sum amount equal to your future pension payments. In other words, if you stuffed your commuted value in your pillow then pulled it out over 30 years, you’d spend everything. Of course, a pension is better than your pillow because the pension invests the money. Then you get the growth and earnings.

The commuted value of a defined-benefit pension in Canada is calculated using the actuarial present value of the future stream of payments from the pension. Actuarial present value is the amount that would be needed today to pay for a given stream of future payments.

The commuted value is sometimes called the cash value or lump sum value of a pension plan. This is because the commuted value represents the amount that could be paid to an employee today in exchange for all future payments from the pension plan.

The commuted value is then divided by the life expectancy of the employee to calculate the annual pension benefit payable to the employee.

If you’re a mathematician, here’s the typical formula to calculate commuted value: PV = FV/ (1 + k)^n.

Looks complicated? That’s because it is. Commuted Value isn’t easy to estimate because each company may have different ways of calculating it based on a number of factors. This is why it’s usually best to simply request an estimate from your employer. They will do the calculation for you and send you the estimate for your review. When they send it, bring that estimate directly to a Certified Financial Planner to do an analysis on. The team at Pension Solutions Canada can do this for you, simply call us at 1-888-554-6661.

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Is My Pension’s Commuted Value Enough For My Retirement?

Of course, the biggest challenge facing most retirees is determining how much money they need in order to maintain their current standard of living. This is the question that most advisors are asked and one that is the subject of countless books and articles. As mentioned previously, an individual’s financial needs will depend on his or her health, lifestyle, the location where he or she plans to live and the kind of housing that will be needed. The good news is that you control your own spending.

Take The Company Pension or Commuted Value?

Clients with defined benefit pension plans may reach a point where they must decide whether to take the pension or commuted value. It’s important to know what your commuted value is, because you can then take that amount and shop it around to insurance companies to see if they’ll match it (or ‘copy’ it). This is typically referred to as a copycat annuity.

It is purchased from an insurance company, such as Canada Life or Sun Life, and is then the pension is paid to you from the insurance company.

An annuity contract allows you to take your commuted value pension and turn it into lifetime guaranteed income for yourself then for someone else, such as your spouse.

Annuity contracts are guaranteed by an insurance company. That means that they have very low risk of defaulting like other investments might have. If your employer has a risk of going bankrupt (such as retail companies or automotive brands), then a copycat annuity might be a great choice for you. If the insurance company fails, you have extra protections.

If you are unsure which option to take (company pension or commuted value), contact Pension Solutions Canada and speak with one of our Certified Financial Planners to assess your options free of charge. You can reach us at 1-888-554-6661.

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What Is A Defined-Benefit Pension?

A Defined-Benefit Pension is designed to provide a specified amount of monthly income after retirement. This monthly income is a percentage of your salary during working life.

You usually must start receiving pension payments when you reach age 65 or the normal retirement age set by your employer. You may be able to start receiving payments as early as age 50.

You generally can’t withdraw money from your pension plan until you retire. However, you may be able to withdraw money from a defined-contribution plan before retirement.

Inflation Protection

Inflation protection means the amount of pension after retirement is adjusted according to inflation. Typically, a government pension is fully indexed to the Consumer Price Index (CPI) on your first day of retirement. The indexing of your pension ensures that it keeps pace with the cost of living, which will help protect you from inflation. There are two types of inflation protection methods: fixed rate and variable rate. Fixed rate is easy to understand, the amount of pension is adjusted by the rate specified in the plan. Variable rate is a little more complicated; this type of inflation protection uses a variable method (such as Consumer Price Index) to adjust the amount of your pension.

If you’re not sure about which option is best for you, speak to a Certified Financial Planner. At Pension Solutions Canada, we can help you determine which option is best for your circumstances and refer you to quality Life Insurance providers. We’ll also help you with estate planning, address tax minimization, and answer all of your retirement questions.

Private pension normally do NOT offer inflation protection. So, your monthly income will effectively decrease over time as it’s eaten away by inflation.

Call us at 1-888-554-6661 to get started. Our services are no cost to you.

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