Author Topic: Would you commute a good Pension Plan?  (Read 1783 times)

Fortuna

  • 5 O'Clock Shadow
  • *
  • Posts: 45
Would you commute a good Pension Plan?
« on: March 06, 2017, 06:00:34 AM »
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?

MDM

  • Walrus Stache
  • *******
  • Posts: 9727
Re: Would you commute a good Pension Plan?
« Reply #1 on: March 06, 2017, 07:16:20 AM »
...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. 
...
Is this a common adviser ploy?
Yes.

Your instinct appears good.

That may or may not be enough to dissuade your BIL....

MorningCoffee

  • 5 O'Clock Shadow
  • *
  • Posts: 98
  • Location: Ottawa, Canada
Re: Would you commute a good Pension Plan?
« Reply #2 on: March 06, 2017, 07:39:23 AM »
Commuting a pension can be a good idea (I did it a few years ago)... but this is terrible. They need a second opinion, and maybe a third, from a fee-only advisor. Their current "advisor" sounds like nothing more than a salesman looking to pay himself a nice salary.

This decision is a huge one. It needs to be an informed decision, based on Math and facts, not emotions and fear. I did tons of research before making a move (and I'm still not even close to being an expert). If they don't understand pensions and investing, they at least need to see someone who does. And that person can't be the person who will profit from their decision (like their current "advisor").

If they chose to go with the pension:
1) You're right, they can income split pension income to save on taxes.
2) Most defined benefit pensions have minimum payout guarantee (like 10 years of full payout if the person dies). They don't just lose it all if something happens 6 months into retirement. Yes, wife may get a reduced pension, but it will be there for life. They should go over their pension plan to learn the details of their actual plan.

Everything else sounds like fear mongering. If I were in your shoes, I'd also be jumping up and down and screaming no.

Reynolds531

  • Bristles
  • ***
  • Posts: 299
Re: Would you commute a good Pension Plan?
« Reply #3 on: March 06, 2017, 07:49:24 AM »
This advisor should be avoided at all costs. Primerica? Quadrus?

Jumping up and down and screaming no is the appropriate response.

Fortuna

  • 5 O'Clock Shadow
  • *
  • Posts: 45
Re: Would you commute a good Pension Plan?
« Reply #4 on: March 06, 2017, 02:44:43 PM »
Thank you for the replies - I believe the adviser is from a smaller local credit union and is advising them to put some or all of the money into a Fidelity Pool Balanced fund.  I pointed out to my Sister and BIL that even if they understood that fund and it was the best choice, there is an adviser series that does not pay trailer fees (although this fund has a .98% MER and you could still go cheaper) and they could push back on any adviser and tell them they are not willing to pay that much for advise.

But you are right a fee only adviser to guide them if they are going this route would be the way to go.

RichMoose

  • Pencil Stache
  • ****
  • Posts: 966
  • Location: Alberta
  • RiskManagement
    • The Rich Moose | A Better Canadian Finance Blog
Re: Would you commute a good Pension Plan?
« Reply #5 on: March 06, 2017, 04:31:59 PM »
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!!!

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?

They should call Garth Turner & Team. He's probably one of the better fee-only advisors for retired/retiring people in Ontario. Honest, relatively low cost, embraces the use of ETFs, and has a great understanding of diversification and balance for people who are afraid of investing. http://www.turnerinvestments.ca/

With a good financial advisor, they will almost certainly be better off commuting the pension and investing. They should be able to withdraw 4-5% of their portfolio annually, at $1.2 million that's $50,000 - $60,000 a year, probably tax free or close to it. Using an advisor there are strategies they can use to reduce the tax bill on the asset transfer.

Their advisor is only fully correct on point 2. Point 1 is negated because they can split the pension regardless. Point 3 is probably not true because I'm guessing the advisor is only taking distributions into account. I'm willing to bet $50,000 - $60,000 a year is more than their expected pension benefit. Point 4 shouldn't matter as health insurance etc is generally separate from the pension plan, but I don't know the specifics of HydroOne. Point 5 is simply fear mongering when considering a plan like HydroOne's.

With a bad advisor they will likely be much better off just taking the pension. Yes, greedy advisors do this all the time to get people into high cost funds. If the funds they recommend have DSC fees, the advisor can pocket tens of thousands in one shot on convincing them to go with their strategy. Big payday!

And Fidelity Canada might just be one of the most crooked mutual fund providers in this land. They love marketing funds with loads, they are notoriously bad for manipulating their "benchmarks", they turn funds over and merge funds like there's no tomorrow, and they chronically underperform over the long term.

*Edited for more detail*
« Last Edit: March 06, 2017, 04:41:33 PM by Mr. Rich Moose »

Fortuna

  • 5 O'Clock Shadow
  • *
  • Posts: 45
Re: Would you commute a good Pension Plan?
« Reply #6 on: March 06, 2017, 05:26:04 PM »
Thanks Mr Rich - the Hydro pension actually pays out a little better than that.  Part of the reason I see it as hard to leave - so long as you feel it is safe a really good indexed to inflation wage.

Turner is a good read on his blog, although he has been flogging a real estate crash for about 8 years now and may finally be right - I am familiar with his recommendations. 

Cassie

  • Walrus Stache
  • *******
  • Posts: 5898
Re: Would you commute a good Pension Plan?
« Reply #7 on: March 06, 2017, 05:35:17 PM »
Your instincts are good and the entire thing is a very bad idea.

Reynolds531

  • Bristles
  • ***
  • Posts: 299
Re: Would you commute a good Pension Plan?
« Reply #8 on: March 06, 2017, 06:53:27 PM »
This has been bugging me all day. I used to work for a pension, and we would bristle at losing to advisors charging 1 percent.

This is the definition of a SALES PERSON. Not a financial guru to best look after your family.

Rant off

RichMoose

  • Pencil Stache
  • ****
  • Posts: 966
  • Location: Alberta
  • RiskManagement
    • The Rich Moose | A Better Canadian Finance Blog
Re: Would you commute a good Pension Plan?
« Reply #9 on: March 06, 2017, 07:05:41 PM »
Thanks Mr Rich - the Hydro pension actually pays out a little better than that.  Part of the reason I see it as hard to leave - so long as you feel it is safe a really good indexed to inflation wage.

Turner is a good read on his blog, although he has been flogging a real estate crash for about 8 years now and may finally be right - I am familiar with his recommendations.

If their monthly benefit exceeds 5% and is fully indexed, I would definitely recommend they stay in the plan. Especially because they're not financially literate when it comes to investing. This combination is rare for most pensions right now given the low interest rates they use in their calculations.

I like Garth's blog as well, amusing anyways. His biggest fault is trying to predict a top. An impossible feat in emotional marketplaces. I don't disagree with his asset management and constant warnings to would be home buyers about going deep into debt to buy a house. Even if prices just increase with inflation from here on for the next few decades many of these new buyers will be in serious financial trouble.