The quandry

If there are two questions I am asked with stunning regularity (besides, of course, ‘How did you get those chiseled abs?’) they are:

(a) Should I take early CPP (A: yes, always), and
(b) Should I commute my pension.

‘Commuting’ a pension simply means withdrawing the money you and your employer put into a registered plan over the years, instead of leaving it there and drawing a monthly income. These days, when 70% of people lack a corporate pension – and the majority are just glorified group RRSPs – most of us don’t have this choice. But for those who do, it’s a troublesome decision. Which it should not be.

However, Evelyn is struggling,

“While reading your comments in December 21st blog re ‘Peter’, and without getting into too many details, I’m wondering generally what your thoughts are regarding commuting pension funds vs. taking a monthly pension?

“I met with my investment executive who suggested taking the commuted value (just barely over $300,000) vs the monthly payment ($1325.00) is not likely to provide any added benefit. Both are pitiful, I worked for a major bank and had broken years of service in between having my children for which I’m being penalized, in my opinion.  I’m still on the fence and have a bit more time to decide.

“I would appreciate any advice you have. Thank you for your blog, for your intelligence, insight and humour and your love of dogs!!”

Like most things financial, this is more an emotional decision than a logical one. Once more, let’s lay out the key facts.

Logically, here are the five reasons commuting is a no-brainer:

Control: Stick with the pension plan and you surrender complete control of your money. The plan administrator makes all investment decisions, and over the decades of your retirement may or may not be competent. Control is good. Always.

Returns: While 2018 was an unusually sucky year, balanced portfolios have averaged about 7% over the last half-century. Many pension plans fall below that benchmark, so before you make any decision check out what yours is invested in, and the track record. Once again, it’s all about control – if you control the money you can be as conservative or aggressive as you want.

Reliability: Retirement is long. Lots of stuff can happen in twenty or thirty years. If your pension plan is under-funded, benefits could be cut in the future (ask Stelco workers about that). If it depends on new members’ contributions to pay existing retirees, that’s a big red flag. If it’s a public pension, it could be subject to political changes (as has happened in the US). If the sponsoring corporation fails or falters, the plan could be impacted. Why take the risk?

Taxes: If you stick with the pension plan every monthly cheque for the rest of your life will be counted as taxable income. That could affect other pensions, like your OAS. It could push you into a higher tax bracket. If it’s money you don’t actually need for a while, the unwanted income stream could cost you a lot in additional levies. But if you commute, taxes are payable off the top on about half the amount, while the rest is rolled over into a tax-free vehicle. For the rest of your life you can choose when you want to take income, and how. If you put a bunch of the dough into a TFSA, for example, it can grow and provide income that doesn’t reduce government pogey payments by a single dime.

Succession: Stick with the pension plan and when you croak the payments stop. Some plans offered a reduced payout to beneficiaries, or for a limited time. But if you commute the pension your family gets all of the money, since it’s in your possession. Most of it can usually be transferred to your squeeze with no tax implications.

So why do people debate this so much? Why do most end up taking the monthly pension plan payments? Simple. They don’t think it through or (more commonly) feel the monthly cheque is ‘secure’ as opposed to the potential of ‘losing it all’ in bad investments. This is the same reason people buy GICs, spend all of their money paying off low-interest mortgages and marry tall men. Emotion. Perception. Rote.

Now you know, Evelyn. Print this off and give it to your advisor. As you fire her.