The commuted value [CV] of your defined benefit pension plan is the money or capital needed to pay your pension to you for life.
In other words, the CV is a lump of cash. Your pension plan actuary calculates what amount must be allocated in order to pay your pension.
If there are 10,000 employees in the plan, then add up all those pension obligations. Is you pension plan fully funded or under funded? But that’s another matter.
How do I know how much money I have when I commute my pension? The answer: your company pension administrator has the exact answer. Anything else is a guess.
So, let’s guess. Add up all your pension payments to age 85, the take 60% – 80%. Your CV will be near that. You might say to me, “that’s a big spread”, but remember, the CV is impacted by bond yields, age and gender. Essentially, we’re calculating the present value of future cash flows. Sorry, by that I mean, add up all your future payments then factor in growth of that cash. Confused? It’s confusing.
First of all, I repeat, only your plan administrator has the exact answer. Connect with them.
Secondly, the Maximum Transfer Value [MTV] will carve out some major tax from your non sheltered portion. That is going to hurt far worse than miscalculating your CV.
Next up, you control your spending. Live within your means. Pay off debt. If you are having trouble paying down debt while working, how are you going to manage when your income drops in retirement?
What’s the best solution? Double dip.
Take your CV. Invest it, don’t spent it. Then keep on working. Get a job you love which will pay your ‘operating expenses’ i.e. your family living expenses: food, house, cars, fun, etc. Imagine that you’re working your new job beside someone with no pension. You, on the other hand, have security via your CV. And if you really need a yacht, you can buy it.
Conclusion: only your plan administrator can cite you exactly your CV.
