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Does Cashing Out Your Pension Make Financial Sense?

If you've left a job or will be retiring soon, you may have the option to cash out your pension and put the commuted value into a retirement vehicle such as a LIRA or an RRSP.

Taking a lump sum does help provide you with some investment opportunities, but it also comes with the risk that you may be tempted to overspend early in your retirement.

Essential Issues To Consider Before Making a Decision

Before deciding to cash out your pension, you should have as much information as possible! You need to know:

  • What age your pension starts at, how much you'd receive, and if your pension is indexed – that is, it increases with inflation.
  • How much of your pension can you put in a LIRA or an RRSP if you commute it?
  • If you can't put all your commuted pension in an RRSP or LIRA, what amount of taxes will you have to pay?

Also, consider more personal issues such as:

  • How is your health and life expectancy?
  • What kind of investor are you?
  • Are you interested in leaving money for your estate?
  • Will you have any other sources of retirement income?

Comparing Future Income Possibilities 

The next step is to compare your expected pension income to income that could be generated from the commuted value of your pension. When your financial advisor models projected revenue, they should discuss with you:

  • The rate of return your investments will need to earn to match your pension income, based on a specific life expectancy.
  • What kind of investments they recommended to deliver the required rate of return.
  • What kind of assumptions they are making around inflation and investment returns.
  • What the locked-in portion of the commuted pension value will be.

What's Your Money Personality?

The final thing to take into consideration is your financial behaviour! Are you the kind of person who prefers the guarantee of a regular cheque for life, or are you comfortable with risk if it comes with the potential for higher returns?

As well, will you have the self-control not to spend extra money if you commute your pension? Or will you be concerned about outliving your money and reluctant to spend anything at all?

We Can Help!

If you're trying to decide the best route to take when it comes to your pension, we can help – give us a call today! We'll put together a detailed financial analysis to help make this big decision easier.