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What are the benefits of taking the Commuted Value pension option?

When it comes to retirement, everyone’s situation is unique. Depending on your immediate financial obligations, retirement goals, or lifestyle, receiving your pension payout in set amounts every month may not be enough.  

With most employee pension plans, you’ll have little to no ability to manage your pension fund yourself, putting you at the mercy of your company’s future financial health.

And if you’re an auto-worker in particular, the past decade has shown that your company is vulnerable to collapse and closure, which would put your entire pension in jeopardy.

If you have these concerns, it could be that a commuted value pension option would be best for you.

What is “Commuted Value”?

“Imagine an average retiree who is collecting a pension from their old company,” says Bruce Youngblud of Pension Solutions Canada. “If they’re getting $3,000 a month for life, that means the company has set aside a sum of money to make those payments – $900,000, for example. That lump sum is based on the forecasted value of the retiree’s pension’s over the next 30 years, adjusted for inflation and interest rates, and divided into monthly payments.”

This is the “commuted value”, and though many retirees will opt for the monthly benefit, depending on your plan, it may be possible to take the entire amount of your commuted value in one payment. 

Advantages of Taking the Commuted Value Option

Let’s go back to that hypothetical retiree. With the commuted value option, they have the entire $900,000 amount within their control. The money would come in a single payout, with some of it in the form of locked-in pension money, and the rest is taxable cash. 

This retiree will now be able to manage the funds directly. They can, for instance, pay down credit cards and mortgages so that they can enter retired life debt-free. They could celebrate the end of working life by taking their family on a luxurious vacation. 

They can also choose their own investment options. For example, if they hired Bruce Youngblud to manage the pension, Bruce would be able to grow the money beyond the original commuted value, which provides peace of mind for the rest of their days. Once they reach the end of life, our retiree would also have something to leave their spouse and children. 

Finally, by taking the entire pension amount out of the hands of the old company, our retiree’s pension is now secured in case the company shuts down. This is of particular concern to auto-workers, as the car manufacturing sector has proven to be vulnerable to collapse since the 2008 economic crisis. 

Of course, if you choose the commuted value option, you’ll want to take it at a time that allows you to minimize your tax payouts. (For example, you could work for nine months and then take the commuted value).

Case Study: Tracy

“There was a teacher who hired us fifteen years ago,” says Youngblud. “Tracy wanted to take the commuted value of her pension fifteen years ago. She paid off all of her debt and decided to work a part-time job. She still draws pension money from the commuted value of her pension, even today.” 

Regrettably, Tracy had a bout of cancer during that time, and though she did recover and is in good health, had she passed on, that money would have gone on to her husband and her kids. Youngblud notes that this is a good advantage of taking the commuted value option. “If you need the money now, and you let us manage it for you, you’ll have something left over to give your loved ones.” 

Free Online Seminar About Your 3 Options

Pension Solutions Canada offers free seminar online video for those who are looking ahead to the end of their working days. 

If you would like to learn more about the advantages of taking the commuted value option for your pension, watch our video presentation here.

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Watch Our Free Pension SeminarCertified Financial Planner, Bruce Youngblud, explains your 3 pension options when retiring or laid-off.
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