Pension Options When You Retire

by Tax Guy - Burlington Accountant on February 24, 2011 Print This Post Print This Post

If you are a member of a pension plan, you cannot withdraw your contributions until you retire or cease to be a member of the plan. However, when you do retire, your employer may provide you different options for your pension.

You may be offered lump-sum payments, Regular annual pension income, Bridging benefits, or any combination of these options.

Making the right choice can be challenging and you may need the assistance of a professional financial planner or accountant. Hopefully this information will help you to take the choice that’s right for you.

Lump-Sum Payments From A Pension Plan

You may be given the option of receiving your pension as a lump-sum payment known as a commuted value. This lump-sum payment is an estimate of the present value you would need to invest today to generate the benefit provided by your pension plan.

By meddygarnet via Flickr

A portion of the commuted value must be transferred into a locked in retirement account which is a special kind of RRSP that has limits on how much can be withdrawn from the plan.

A portion of your commuted value payment may also include a fully taxable payment. This amount is known as an ineligible amount and may be a significant amount.

Regular Pension Income

If you are at retirement age, you will be offered one or more regular monthly pension options. These payments will be in the form of a Registered annuity that will be fully taxable when received.

The payment option may be the same amount per month for life or annually increased with the rate of inflation. You may be required to have survivor options for your spouse and the amount the spouse would be guaranteed may be 60% of the full pension or more.

Bridging Benefits

If you are entitled to retire early, you may be offered a bridging benefit. The bridging benefit is a special form of payment that is intended to compensate you for Old Age Security and full Canada Pension Plan benefits you cannot receive until age 65.

Making The Right Pension Choice

When making the decision to take a lump-sum or other payment options, you need to consider your own personal situation.

If you are evaluating the various options, you should consider rates of returns on investments in retirement, your projected life expectancy, and income taxes. However, avoid making a decision based solely on financial data alone.

Other pension considerations you might want to think about  might include your life expectancy, need for capital, or other benefits that may come with the regular payment options. Take a look at our article on Other Pension Considerations for more information.

Get Objective Advice

When you look for independent help with your decision, beware of quick answers or “general rules”. Many financial advisors are commissioned salespeople who receive the bulk of their compensation from selling investment products and may be motivated to encourage you to take a lump-sum.

A fee-only planner or other fee-only financial professional is in a better position to provide an objective evaluation of your personal situation. Since you are paying only for their advice, you can be assured that the answer is not motivated by a desire to sell you an investment product.

If you are faced with the decision to take a pension or lump-sum, I can provide you with an objective analysis and recommendation tailored to meet your specific needs.

Contact me today to discuss how I can help you with your pension.


About The Tax Guy...

Dean Paley CGA CFP is a Burlington accountant and financial planner who services individuals and business owners locally, nationally and internationally. Dean has appeared in the National Post, Toronto Star and Metro News.

To find out more, visit Dean's website Dean Paley CGA CFP or connect via Twitter @DeanPaleyCGACFP.

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Michael James February 24, 2011 at 10:47 am

Another thing to consider is the funding state of the pension plan. A buddy of mine had to make this choice just shortly before the first announcement that Nortel couldn’t make full commuted value payments from their pension plan. But it was obvious long before this that Nortel was in serious trouble and that the pension plan was underfunded. The advice my buddy got from a pension expert involved a bunch of calculations that failed to take into account the possibility that he would never get the full amount owed if he took the pension. Fortunately for him, he got his full commuted value out before Nortel started discounting the commuted value payments.

Tax Guy February 24, 2011 at 11:09 am

Hi Michael,
That is a very good point. The Job Loss And Your Retirement Pension Options article that I link to in the post briefly mentions the future stability of a pension as a consideration.

Most government and crown corporation pensions are rock solid but many of the company pension may be covered by some sort of pension fund protection (Ontario has such a fund).

Bob February 26, 2011 at 12:07 am

I am currently contributing to two pension plans. One municipal and one federal. I am considering transferring the federal pension plan to which I have been contributing for 5 years full time and 14 years part time (Since 1991). The municiple plan has received contributions for 14 years (since 1996). The municiple plan has an 80 formula for retirement.; the federal 85. Would this be advantages and lead to an early retirement, or should there be other factors I should be considering

Tax Guy February 28, 2011 at 9:31 am


Unfortunately, I can’t answer your question in specifics or even provide you advice. There are far too many variables to consider that can affect the outcome. For example, your current marginal and average tax rates as well as your projected average tax rate in retirement will impact the outcome. In addition, whether you combine the pensions, commute some or all of these pensions and your risk tolerance is also a factor. Other factors include whether you are married at the time you retire and take the pension, bridge benefits, life expectancy of you and your spouse, health, other benefits from these pensions etc.

I would suggest you hire an independent financial planner (i.e. one who does NOT work for an investment dealer and who charges a fee for the service or a professional accountant).

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