DB pension or take lump sum

[Dmy0013]

Some friends of mine asked me for advice.
Should he just be happy with his DB pension and live out his life worry free (includes survivor benefit for his wife)
Or should he take the lump sum which is 2 - 2.4 million bucks and invest himself?  He figures he needs 80,000 annually for fun money so he just makes the 4% rule.  He feels like it is his money and he put in his 30 years.  Because he feels that way he wants his money and to leave some behind for his kids.  His wife however thinks that living worry free with a guaranteed income is better.

Now I don't know how this lump sum would be taxed... does it go right into a LIRA with no taxes taken off until they withdrawal? Or is it taxes as soon as he takes the lump?

They also own their house which is roughly 800,000 and have maybe 100,000 in play money in stocks.
They do not live an overly mustachian life as u can tell..

Do u think there is a risk taking the lump sum? They would leave the money with an advisor as they have no interest in doing it themselves now the knowledge

Not sure if it matters but we r Canadians living in Canada

[Al1961]

Most of it will probably be subject to tax.

You can shelter a portion in a LIRA using a formula based on age and the annual benefit. At age 53, it is 10*benefit.  If there is RRSP room, then you can fill that up, but the rest gets taxed, and most of it will be taxed at the highest marginal rate.

If half of it is taxable, then over $500k will be lost to taxes in Ontario. 30% will be withheld up front, the rest will have to be paid later - Dec 15 if he already has installment requirements, or following April 30.

Usually you cannot take a commuted value withdrawal if you qualify to collect a pension, but the rules depend on the individual pension plan and provincial, or federal, regulations. Depends on which jurisdictions' rules govern the plan.

If he has 30 years in, I'm guessing he's in his mid-to-late 50s. Probably best to take the pension. Just take a good survivor benefit option.

(Says the guy who took a somewhat smaller commuted value payout at 53. But then I didn't qualify for an unreduced pension for 7 more years.)

Al

[powersuitrecall]

Additional to the great points that Al1961 brought up ...

How long until your friend can start taking his pension?  Is that what's driving him to make this decision right now?  If it's not too long from now and he is comfortable living on the 100K in investments in the meantime, consider taking the deferred annuity option.

If he takes the buyout and has a FA manage the investments, he should seek out a fee-based advisor that will better represent him.  2M is not the kind of money you want to have with a commission-based advisor.

Also - Does the pension come with any health plan coverage or other insurance?  Make sure to calculate that!

My gut says your friend would do better to keep the pension and forget the hassle of dealing with investments.  It sounds like he's close to vesting  Regardless, it would be a worthwhile exercise for him to get a detailed breakdown of the pension buyout, and then to calculate how much would end up all his accounts after the taxes are dealt with.

Good luck!

[Righty]

Is this a public or private pension? If private, is it large respectable company?

Not sure about Canada, but in the US many times pensions are cut by management or bankruptcy and thus having the cash in hand today is a safer bet than trusting the company to fulfill its promises in the future.

 

[powersuitrecall]

Is this a public or private pension? If private, is it large respectable company?

Not sure about Canada, but in the US many times pensions are cut by management or bankruptcy and thus having the cash in hand today is a safer bet than trusting the company to fulfill its promises in the future.

Good point.

Private pensions are definitely a concern here in Canada.  Just look at what happened to Nortel - a large and well respected company.  When it declared bankruptcy, the pension assets became accessible to the corporation for restructuring, which in this case included paying massive bonuses to executives and packaging up the divisions for sale.  Pensioners saw their payments slashed. it impacted thousands.

On the other, hand public pensions are solid as can be.