Receiving a regular monthly pension has both advantages and disadvantages including:
- While the pension payments are fully taxable, you will receive dependable monthly income, indexed to inflation for as long as you live.
- You won’t have to worry about market fluctuations with a monthly pension amount, however, there is no flexibility in your payments.
- The pension will end upon your (or your spouse’s) death, leaving nothing for an inheritance.
Taking the commuted value lump sum has both advantages and disadvantages including:
- You will receive a large cash payout, subject to tax rules, flexible enough to use however you wish now. However, you may be tempted to use this money for your short term needs, depleting funds set aside for your retirement.
- There are no payment guarantees, so careful asset management is needed to ensure market risk does not adversely affect your funds.
- When you die, any remaining balance can be passed on as part of your estate.
The Commuted Pension infographic outlines just some of the many factors to consider before making a decision. Other considerations would include:
- Other retirement income sources
- Health insurance or other benefits that may be tied to the pension
- Overall health
- Short term and long term needs
- Retirement Readiness
- and more
The infographic is meant to help start the conversation about pension choices.
This infographic works well with the Commuted Pension calculator in FreshPlan and compares taking the commuted value of a defined benefit pension to taking a lifetime pension. The calculator considers taxable income, age, Canadian Income Tax Act present value factor, rate of return, amounts that can be transferred to a locked in account, RRSP room and more. Find this and other retirement calculators in FreshPlan.
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