Commuting Your Pension: Is it Worth It?

Posted on May 8, 2013 and updated October 26, 2018 in Canadian Life Insurance Companies, Industrial - Alliance Life Insurance, Life Insurance Canada News 3 min read
senior-couple-on-beach
If you leave your job early,
you may consider
commuting your pension

When an employee feels like it’s time to leave their job, whether they retire early or resign from the company, they may have the opportunity to commute their pension. 

This allows them to have their pension in their hands early when their employer assigns a dollar value to what that pension would be if the employee were to retire right at that moment. But how do you determine what that dollar value should be? We asked Alex Lekas, director of sales for Industrial Alliance Insurance and Financial Services Inc., for the answer.

“Typically, your employer will do the value calculation for you,” he says. “They would take into account your age, years of service, what type of pension you would normally receive at retirement and using those pieces of information, they would come out with a dollar value in terms of a lump sum payout that they would give to the employee.”

Once you receive your commuted pension, under the Tax Act, there’s a certain amount that isn’t taxable that’s called The Maximum Taxable Transfer Limit. However, as Lekas points out, if your commuted pension amount happens to be above that maximum taxable transfer limit, the amount may still be subject to applicable income taxes.

The question always is, should you commute your pension or not, and is it worth it if you do? Lekas contends that the answer depends on what you want to get out of your retirement.

“For people that would like some additional income flexibility in retirement or if they’d like the ability to plan for their estate, possibly commuting their pension would provide them with some better opportunities to accomplish those goals,” he says. “You’d have to do the analysis ahead of time, but all things being equal, commuting your pension could provide you with additional income flexibility that you wouldn’t get by just staying the course and taking your pension from your given employer.”

Of course, like anything, there are certain risks and pitfalls you should be aware of that are associated with taking a commuted value. One is the fact that many companies suggest that if you take a commuted value, you are essentially severing all your ties with them.

“In terms of any retiree health and dental benefits, you may not get those anymore, as well as any other additional benefits you may have received,” says Lekas.

For example, consider someone who works for GM or Ford and therefore has some additional benefits as discounts on new cars. She will not receive those benefits anymore because she’s essentially cutting her existing relationship with the company off. Also, from an income perspective, she may not get the same guaranteed income that she would’ve had under a regular pension.

“All of these potential risks depend on how the pension is set up, which is why I would recommend that any person considering commuting their pension speak with a trained financial professional who can walk them through the various options that are available in order to try and make the commuter’s income more guaranteed and more secure,” Lekas concludes.

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Cristina
Cristina

Hi Chantal,

I really like all the information from your website. I have a question, this is for my sister. She’s interested to get a Life Income Fund ( for her retirement – she is now 47 years old)

What can you recommend?

Thank you!

LSM Insurance
LSM Insurance

Thanks Cristina. I’m happy to help and just sent you an email. It’s hard to make any specific recommendations without knowing a little more about her situation.