Bit of a long post - but please read, good story here and I need help. I have a family member (BIL) who is retiring this year from HydroOne (the public power utility here in Ontario). They have a defined benefit pension that will pay them a good inflation indexed pension. This is thought of as one of the more stable pensions out there it is a government owned utility, although the current government is talking about privatizing.
My BIL went to a financial adviser who is telling them to commute the plan. For these reasons:
1) If you do then you can income split with your wife and save taxes. (I think they can income split anyway so this might be moot)
2) If the BIL dies the wife gets a reduced pension, commute it and you own the money. Same thing if they both die the pension dissolves nothing for the kids.
3) If the adviser is showing them a plan saying they can set aside a large chunk of the commuted value in TFSA and an investment account, and they are telling them they can invest the rest for them and generate an income just a little below what the plan would give them.
4) They will keep 25% of the plan in the pension get a small payment from that and keep their benefits.
5) If the plan pension plan blows up you have your money - I see this as fear mongering.
They tell me this and alarm bells are going off in my head. I always thought they have a set retirement, very good pension you do not have to manage investments. Also note that my sister and BIL are not investors, do not understand mutual funds, ETFs, fees, SWR, sequence of returns risk or anything like that. They have never learned because they had a pension.
I see these big problems, first they have to pay a $400K tax bill to commute as they are taking out the money and cannot shelter it all in RRSP/tax accounts. Second they do not understand this plan, I don't think they know what it will be like managing the investments and I have concerns that the adviser is over promising results. Third they have never followed markets, do not know how they will get the money out AND they are being advised to put it in a balanced mutual fund that has a 2% MER!!!
Only reasons I see it is a good idea is they will get some cash to set aside and top up investments, and if the BIL dies first his wife does not lose income - by the way he is 60 years old healthy active, his dad lived to 89 and his mom is still going at 90+.
So I am telling them I don't know about this idea - pointing out the risks. Am I wrong here pushing them to rethink a decision they already made? I may be missing things, but my instinct is telling me an adviser is trying to pry loose over a $1.2 Million in pension assets to get it onto a 2% MER mutual fund.
Part of me wants to jump up and down screaming no, but I can't make the decision for them. Anybody seen this before or been through it? Is this a common adviser ploy?