Do you have a defined benefit pension?
about your retirement day somewhere down the line?
You might want to move it up.
With the Bank of Canada’s recent rate cut in response to the economic impact of the Coronavirus disease (COVID-19), your commuted value is at its highest value ever. That means that if you were thinking of taking early retirement and choosing to take your pension in a lump sum, now’s the time.
Key to determining your commuted value is what’s called the ten-year bond rate. Thanks to the Bank of Canada rate cut, the ten-year yield now hovers around or below 1%. In other words, the bond yields just fell off a cliff.
Why does this matter? It all has to do with the advantage of commuted value.
What is “commuted value”, anyway? The short answer is that it’s the lump sum of your company pension.
When you retire, you’ll be given three options: a company pension, a copycat annuity, or a commuted value. If you choose the “commuted value” option, your company actuary will compute its value based on factors such as your age, pension income, and gender, but the biggest factor in determining how much you’ll get are current interest rates: specifically, the bond yield.
Ask yourself, if you could take your entire pension over 30 years into a single lump sum payment. How much would you get if you retired right now? That’s your commuted value, and if you were to hand in your notice today, the low bond yields (i.e. the rate of return) requires that your company give you a larger amount of cash.
Think of it like a teeter-totter: one side goes down; one side goes up. Bond yields go down, commuted value goes up. Right now, the yield side of that teeter-totter is the lowest ever. Do you really want to wait?
If you’re unsure that taking the commuted value option is for you, consider the lifestyle that you want to have, because there are some drawbacks that might not work for you. For example, if you take everything in a lump sum, you’ll have cash to spend, and you might be tempted to let the good times roll. If you spend the money on cars, a cottage, your kids, your grandkids, etc., before you know it, you won’t have a pension anymore. Indeed, the main problem with the commuted value could very well be you.
Secondly, everyone who chooses the commuted value inevitably encounters the maximum transfer value (MTV). This will shave off a large amount of your lump sum money in taxes. However, at the current interest rates, your commuted value will be so high that it will pay some of that income tax.
Everyone daydreams about early retirement. Now is one of the best times that you can start collecting your pension.