Commuted Value vs. Pension?


Date: 29-Jan-98 - 7:22 PM
Subject: commuted value
From: Jim

Does anybody think getting the commuted value from a pension fund instead of taking a pension is a good idea?

Date: 29-Jan-98 - 8:04 PM
Subject: RE: commuted value
From: PK

To Jim -

You might want to check out the following two articles from Canadian Moneysaver Magazine:

Commuted Value Part 1

Commuted Value Part 2

I hope these links work and the articles help.

Date: 29-Jan-98 - 9:54 PM
Subject: RE: commuted value
From: RonB

Jim - so many things to consider. The value of the commutation is one issue and probably cannot be accurately determined until you're within a month of retirement. At least, that was so in my case, since its value depended on a bundle of indexes. In volatile times like these, there could be significant variation, although 18 months or so ago, I was given an early estimate (say 6 months prior to retirement) which was about one third of one per cent below the final pay-out.

So get your employer's best estimates and then shop around for what you can buy with the money. There are more options than you probably ever dreamed. So then I think a big issue is your own risk tolerance and the value of any additional resources available. Do you want some kind of guaranteed income or are you prepared to take your chances on the markets (whether stocks, bonds, MFs etc). And can you forecast the future of these markets/interest rates in the short, medium and long term?

Then take a good close look at any benefits that come with your pension package and what it will cost you to replace them - assuming that your commutation cuts you off from these benefits of your employer's plan. Is your pension indexed, for example? Do you have ("free") health benefits which would need to be replaced through insurance?

What is your family situation? For example, if married, is your spouse also pensionable? If you take the pension, what kind of provision will you plan for your spouse, or will you plan to take just a single life annuity or its equivalent? Do you want to leave an estate when the inevitable overtakes you? How is your health and that of your spouse if you have one?

Even your philosophy of life can come into it - do you prefer to spend money whilst you are still young and healthy enough to enjoy it, as is the case with one of my acquaintances, or do you prefer the cautious route of ensuring that you will still have enough if you live to 90 or more?

So I wrestled with this some 18 months ago. I'm the cautious type. None of the three planners I talked to could give me a "secure" plan which would match the pension, even without providing for the ancillary benefits which went with the pension. These would have cost me about $2,000 a year now and then would rapidly escalate as I aged beyond 70. They could not come anywhere near matching the up to 5% indexing guaranteed by my pension plan (and upwards of 5% at the discretion of the managers, who have never failed to match CPI in over 30 years), although they tended to think that the return on invested money would more than compensate. So I stayed with the plan, as did 93% of the people (145 of us, I think it was) who retired at the same time. I have no regrets, but I won't be leaving that large estate behind me which might otherwise have been the case. And for the record, I should also add that the FPs I talked to were very well informed and highly professional - they laid it all out for me, with a number of options, including the risk which might be associated with each and did not pressure one way or the other. And all this for no charge - of course there was also the investment of a retirement allowance at stake.

I know a number of the 7% who "took their money and ran". They are in general equally satisfied with their decisions - and one of them is a frequent contributor to this forum. The widow of one of them is infinitely better off than she might otherwise have been. One of them is consulting and will not need to touch his money for 15 years. One of them gambled wrong (at least, the reasoning behind his decisions has been overturned) as his cancer seems to have gone away, whilst his pensioned wife is now the threatened one. Another, childless, took his money and a reverse mortgage and has never been so well-off in his life. And of course, the bull market has been kind to them all.

So, sorry to be so long-winded, but I hope this is enough to demonstrate that there is no simple answer to the question you asked. All I can say is don't wait till the eve of retirement to make your decisions, talk to a variety of advisors (they're all VERY interested in anyone contemplating a pension commutation), do the arithmetic as best you know how, evaluate your personal situation as best you may and then cast the die! Like they keep saying around here, you got to be able to sleep at night and only you know what your personal comfort level might be.

Good luck with it.

Date: 29-Jan-98 - 11:51 PM
Subject: RE: commuted value
From: jd

A very timely article written by James Daw of the Toronto Star discusses this issue entitled, Risky to dance to this music. The article is better than the its title.

Date: 31-Jan-98 - 2:52 PM
Subject: RE: commuted value
From: Jim

Thanks Rond My pension should i accept it would not be indexed I think that might be a big factor in deciding about commuted value.I am having a hard time understanding the Pros and cons.There dos not seem to be alot of information around on this subject.

Thanks Jim

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