Lump-Sum vs. Regular Pension Payments: Pros & Cons

If you’re planning to retire soon from your job and have a defined-benefit pension plan through the company you work for, you will be faced with the decision to either:

a) Accept the traditional, lifetime monthly payments or…

b) Take a lump-sum distribution, ‘cash’ payout of your pension.

The lump sum cash payout sure is tempting! Your pension commuted value could be 500k, 800k, or even 1 million dollars or more. Think of all the things you could do with that type of cash!

But like any choices you make for retirement, there are pros and cons. Let’s review some of them:

Lump-Sum Pension Payment

A “lump-sum distribution” is a one-time payment from your pension administrator. Here are some points to consider:

  • You gain access to a large sum of money right away.
  • Lump-sum payment gives you more control and flexibility over your money, allowing you to spend or invest it how you see fit.
  • The amount you withdraw from investments can changed based on your retirement lifestyle needs.
  • The lump sum amount you receive, after taxes are deducted, can be reinvested.
  • If you die earlier than expected, there could be funds left over to be used as inheritance with your estate.
  • Once you and your spouse die, the pension payments might stop if you are on a regular pension payout. However, with the lump-sum distribution option you could name a beneficiary to receive any money that is left after you and your spouse are gone.

There are some negative aspects to the lump-sum distribution option:

  • Income from pensions is taxable, and in Canada it is a big tax ‘haircut’ when you take the lump-sum cash. A significant amount will be immediately taxed, typically hundreds of thousands of dollars.
  • The biggest risk is that your pension is no longer guaranteed to last for life because investment volatility could impact growth.
  • You’re only partially protected from creditors.
  • The lump sum amount you receive requires careful asset management to ensure you have enough to live on for the rest of your life. When you are in retirement, you don’t have the luxury of riding the ups and downs of the financial market. If there is a slump in the economy, or a recession, it can greatly impact your investments which would impact how much you have to pay yourself monthly to live off of.
  • Flexibility is great, but can also be a negative. With a lot of money being accessible to suddenly spend, it can invite overspending, and once you’ve spent the money it is gone for good. A study of retirees revealed that 21% of retirement plan participants who took a lump sum depleted it in only 5.5 years on average.
  • Your health insurance coverage may be affected if you take the lump-sum payout. Some companies that continue health coverage to their retired employees stop coverage if an employee takes the lump sum payout. If this is happens to you, you’ll need to take into account the cost of paying monthly for health insurance coverage from the amount you withdraw each month from your investments.

Regular Pension Payments

A regular pension payment (also referred to as a Lifetime Monthly Benefit) is when you retire and decide to receive a set monthly payment for life. In some cases, depending on your plan, this can continue after you pass away and payments are sent monthly to your spouse until he/she passes.

  • Pension payments are made for the rest of your life, no matter how long you live, and can at times continue after death with your spouse.
  • With a regular pension check, it is harder to splurge or overspend on items that you might later regret.
  • You get guaranteed income for life.
  • Tax is spread equally over your lifetime (stable predictability)
  • No concern about running out of funds
  • No concern about investment volatility
  • Fully protected from creditors

Some dis-advantages are:

  • Being 100% taxable income for your lifetime
  • You can’t adjust the pension benefit amount
  • If you and your spouse die earlier than expected, there is nothing left over that could be used as inheritance

As you can see, there are pros and cons to both options. It comes down to how long you expect to live and how much control you want over your assets.

Let us analyze your multiple income streams in retirement. We’ll make sure to minimize your income tax.

Consult with a professional to help you with this key financial decision! Book a free 15-minute consultation call here.


Planning To Retire Soon, What Should I Do?

First, speak with a Certified Financial Planner. Schedule a 15-minute call here.

Second, you want to know what your “Commuted Value” is. Get a statement with this calculation from your employer to know in advance exactly how much your pension is worth and the amount you’ll be paid out for life once you retire. Watch this video where we have special guest Jon Hreljac (Retire & Estate Planning Services at Manulife Financial) explain the advantages of taking your pension’s Commuted Value option.

Next, start planning, use our retirement resources, and put together your retirement plan and estate plan. Your Certified Financial Planner can help with this.

Next steps when you are close to retiring

  1. Review the information your employer sends employees about your retirement plan. If you are just starting to plan your retirement and want help doing so, consider consulting with a certified financial planner and pension expert by calling us at 1-888-554-6661 or schedule a 15-minute call here.
  2. Make sure your employer is aware of your plans to retire. If your employer is a big company, chances are it has resources to help you. Contact your employer or pension plan administrator to let them know that you plan to retire soon, and ask them the important questions you might have about your pension plan such as:
    • What type of pension plan are you registered in? (eg. Defined-benefit, Defined-contribution, etc).
    • How does your employer calculate the amount you will receive when you retire?
    • What happens if you leave the company before you can collect your pension?
    • What happens if the plan goes bankrupt?
    • How much money has been contributed to the plan, and how much money will be left when you are eligible to retire?
    • How much of your contributions are tax deductible?
    • Are you able to retire early? If so, how will it affect your pension?
    • How much will your beneficiaries get if you die before you reach the normal age of retirement?
    • Who will get your pension if you die before you reach the normal age of retirement?
  3. Find out if you have to make any special pension-related decisions while still working.
  4. Determine how much money you need and what your monthly expenses will be in retirement. For example, if you are currently paying $1,000 a month for housing, what will that expense be in retirement? Do you have any debts such as credit cards or car loans? These questions will need to be answered so that you can accurately determine how much money you will need in order to maintain your current lifestyle once you stop working. Work with a financial professional to create a financial plan that allows for a steady retirement income so you can continue paying your bills while having some extra cash to enjoy and spend on non-essentials.
  5. Make sure you have health insurance in place when retiring so that you are covered if you fall ill or have an accident. If your health deteriorates in retirement, this could force you to leave your home. Budget for medical costs and medication costs, especially if you are in the age group that is more likely to require medical care. In retirement, you can expect to have a higher out-of-pocket cost for health care.
  6. Make sure you have life insurance and adequate disability insurance in place when retiring so that your family can be taken care of in the event of your death.
  7. Set up your bank accounts for direct deposit of your pension. This is the most convenient way to receive your pension.
  8. Get rid of debt. Pay off credit cards or student loans before retiring. Those bills are not going away when you retire, and paying them will be one less thing you’ll have to worry about when you stop working. If you’re not paying them now, you will be when you retire and it will be harder to pay them then.
  9. Make arrangements for your utilities. It’s important that you keep your utility bills as steady as possible. Most utility companies allow you to setup a fixed monthly payment that doesn’t change from month-to-month, averaging out your usage over the year. This keeps your payments predictable and easier to budget for now that you will be moving to a fixed income.
  10. Plan a vacation before you retire (use up those remaining vacation days!).
  11. Decide where you’ll be living. What will you do with your home? Will you rent or own your home? If you rent, how much will your rent cost? If you’re moving out of your home, arrange for the sale of your home and the move to your new home. If you are thinking about moving to another part of the country, be sure to take into account the cost of living. Consider moving to a retirement community. These communities can be affordable and are set up for retirees to enjoy the comforts of home and a wide variety of activities. You may want to consider downsizing your home. You may be able to find a place that is more manageable for you and will be more affordable, especially for property taxes.
  12. Contact your lawyer to make arrangements for any changes to your will when you retire because you may have different estate plans as a retired person than you did when you were employed. If you own your own business, it’s important to review your will and trust documents. There may be special considerations that need to be addressed in the event of your death or incapacity.
  13. You may want to look into senior transportation options and budget for those costs. If you are not able to drive, there are many options that will allow you to get around.
  14. Start a travel fund. You should save a certain amount of money each month to help you travel. You can travel around the country and even the world. If you are planning to travel, consider using a senior discount program for airfare and other transportation needs. Don’t forget to factor in health insurance costs and costs associated with travel.
  15. Make sure you have a good credit rating, especially if you want to rent a house, buy a car or take out a loan.
  16. Consider getting a part-time job to supplement your income. Here are 8 questions to ask yourself to help you make a decision.
  17. Find an activity that you enjoy and can do in retirement to keep you active. You can choose to go to classes, volunteer, or get involved in an organization. Here’s a list of 72 things to do in retirement to get you started.
  18. Review your retirement plan and estate plan with a Certified Financial Planner, speak with one today at Pension Solutions Canada by calling 1-888-554-6661.

Pension Adjustments

If you’re about to retire, you can also ask your pension plan administrator for a copy of the Statement of Pension Adjustment (S.O.P.A.). This statement shows the value of benefits you earned under your employer’s Registered Pension Plans or Deferred Profit Sharing Plans.

Read The Information Your Employer Sends About Your Pension Plan Carefully

The information you get from your employer about your pension plan will help answer some critical questions you should know the answers to in order to prepare for your retirement. If you don’t get the answers from the informational material your employer provides, be sure to call someone in the HR department and ask them questions so you have the answers you need.

Some questions you’ll want to know the answers to:

  1. What type of pension plan does your employer have? (eg. Defined-benefit, Defined-contribution, etc).
  2. How does your employer calculate the amount you will receive when you retire?
  3. What happens if you leave the company before you can collect your pension?
  4. What happens if the plan goes bankrupt?
  5. What are the rules for changing your pension benefits?
  6. How much money has been contributed to the plan, and how much money will be left when you are eligible to retire?
  7. How much of your contributions are tax deductible?
  8. At what age can you start to collect your pension?
  9. Are you able to retire early? If so, how will it affect your pension?
  10. How much will your beneficiaries get if you die before you reach the normal age of retirement?
  11. Who will get your pension if you die before you reach the normal age of retirement?
  12. What happens if you leave the company or change jobs before you can collect your pension?
  13. What happens if the plan goes bankrupt?

Obtaining A Final Pension Statement

When you retire, you must get a final statement that tells you the value of your pension. Bond rates change every day, so it’s important to get this final statement with an actual final value amount (the commuted value) so you can start to plan with your Certified Financial Planner what you’ll do next with that amount of money. You can also take that final pension statement and shop around for a Copycat Annuity from a Canadian financial institution, which may also lead to a cash surplus (extra bonus cash paid to you on top of your pension).

If you are going to get a lump-sum payment, the statement must give you information that will help you decide whether to take the lump-sum payment or to take a monthly income from the plan.

How Much Do I Need To Retire In Canada?

Knowing how much money you will need to retire can be tricky, but it’s important to get a handle on this before you retire. You don’t want to find yourself in a situation where you are completely dependent on others for your income.

Think about how you’re going to be able to pay for your lifestyle without working.

A lot of people have the misconception that they need to live a certain lifestyle in order to retire happy and enjoy the freedom it brings. But, in reality, retirement is about being able to enjoy your time off without having to work full-time.

Connect With A Friendly Certified Financial Planner Today Absolutely Free

Retirement planning doesn’t need to be scary, icky, or overwhelming. It just needs to be honest and simple. At Pension Solutions Canada, we want to help you plan for the future with confidence, knowing exactly what you need to do to get where you want to go.

Pension Solutions Canada specializes in helping individuals prepare for retirement and protect their assets. If your pension is currently with your employer, we can walk you through the steps of moving it out of the company through a copycat annuity with a larger insurer such as Canada Life or Sun Life. We’ll also help you with estate planning, address tax minimization, and answer all of your retirement questions.

Schedule a 15-minute call here with a Certified Financial Planner this week!

More Resources

For more information and resources for planning your retirement, visit our Ultimate Canadian Retirement Planning Guide [2022].

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