Author Topic: To commute or not to commute (your pension value)?  (Read 37819 times)

Joan-eh?

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To commute or not to commute (your pension value)?
« on: December 28, 2014, 07:04:19 AM »
I would be interested in hearing about how people have made decisions to commute (or not) their pension values.  I am in canada, and we sure do have unusual rules.

I have been humming over this question for 11 years, but must decide in 5 months.

What I know:

Total value/ lump sum: 350,000
200,000 goes to a LIRA (50% can be unlocked and moved to RRSP) eventually what is left has to be turned into annuity.
150,000 is taxed at 30% at least
We have full TFSA room for 70,000 of the 100,000 CASH. The remainder makes us almost mortgage free.  Hubby has fully funded RRSP in 30 years work.
I have another pension at my current work, which will be lucrative.

Reasons to keep the pension?  It is fully indexed to inflation. I'm healthy- so far. No worries.
reasons to commute the value? Somewhat more flexibility for withdrawal (or not).  A move toward losing most of the principal amount at death. (Which will be the case in my other pension)

I'm not sure I can "beat" the pension payouts with my own investing because of inflation (boy, it's killer!)

How to make this decision? What was/is your experience?
« Last Edit: December 30, 2014, 09:23:47 PM by Joan-eh? »

BPA

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Re: To commute or not to commute (your pension value)?
« Reply #1 on: December 28, 2014, 07:11:46 AM »
One of my worries is that younger members of the industry are paying in more than I have and will receive less in benefits at the end.  I wouldn't blame them at all for advocating reduction in benefits for those already retired. 

Also, I have no spouse, so once I kick it, the money is gone.

So, I am taking my commuted value. 

Mine is worth about what yours is.  :)

Cassie

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Re: To commute or not to commute (your pension value)?
« Reply #2 on: December 28, 2014, 03:53:14 PM »
My hubby & I took our pensions but we can leave them to one another with a reduction for doing so which is nice.

gonkman

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Re: To commute or not to commute (your pension value)?
« Reply #3 on: December 30, 2014, 10:41:22 AM »

I am in a similar boat but not for another 5-8 years. My wife will get a full pension at 55 with medical benefits that include me.   

I am retiring before 50 to take the commuted value for several reasons.

1. If I go past 50 it is locked in and I will take a huge hit on pension value if I leave when wife retires at 55.  She is 3.5 years older than me.
2. I will have over 100K RRSP room to take the unsheltered portion directly into RRSP with no tax.  I estimate the remainder at approx 70K.
3. With me having no pension and a boatload of RRSPs to draw on from 49 to 71 we can "adjust" our income and do pension splitting to lower our taxes.
4. My wife will have a full DB pension with Medical to cover us both so I don't need mine.
5. We are loading our TFSA to the max until 55-60 age and then can draw on that Tax free till the cows come home.  :)
6. I calculated what my pension would pay if I left at 50, 55 and 55 and deferred it until 60.  I can get more out of it then it will pay with Reduction Amount unless I live to 100!
7. We just paid off our mortgage so that is a BIG chunk of expense gone now until we retire.

It all depends on your situation...  But I had some major factors to make it easier. 

Every person is different and it depends on your situation..




Al1961

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Re: To commute or not to commute (your pension value)?
« Reply #4 on: December 30, 2014, 11:38:10 AM »
I made the decision to take the commuted value in May, and retired at the end of July.

Factors in the consideration:
1.CV is >$750k, substantially more than expected - due to the historically low discount rates applied by the CIA in calculating the CV. (I dug out the actuarial standard for calculating commuted values and re-performed the calculation myself, because I didn't really believe the amount that the pension administrator provided, ended up within ~$2k :) ). Half goes to a LIRA, half I get to pay taxes on (so tax bill ~$130k next year).

2. We have other savings in RRSPs, maxed TFSAs and taxable brokerage accounts.

3. DW will receive an unreduced, fully-indexed Federal pension @ age 55, and retain the Federal health plan into retirement. This will fund 80% of expected retirement expenses. (her choice to continue working the next 3.5 years)

4. We'll receive two CPPs (both at about 75%) and two OASs. Trying to decide whether to start CPP @ 60 or wait. We won't really need the CPP @ 60, but hey, we can invest the excess.

5. I did a lot of modeling of our incomes and expenses out to age 100. Model included conservative assumption of 2% real return over this time span; tax estimates, including pension splitting; travel budget to escape winter.... Everything looked good. In fact, we are likely to pass a rather substantial legacy on to our children. The model can't deal with sequence of return risk, so:

6. Crosschecked 5. with cFIREsim - we had a 0% failure rate.

7. There will be some "family money" coming our way some day. We don't need it, but it will be another buffer in our later years. Most likely we will do what the past two generations did - invest it and pass along an increased amount to the next generation.

8. Due to a recently diagnosed heart condition, I have a substantially increased risk of stroke. I feel my wife is better protected by having the CV in our possession, and conservatively invested, than by the survivor benefit she would have received from my pension plan. (Listed last, but not the least important consideration.)

Al

Cassie

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Re: To commute or not to commute (your pension value)?
« Reply #5 on: December 30, 2014, 02:40:29 PM »
Joan, my hubby ran the numbers & we did what made the most financial sense.

Al1961

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Re: To commute or not to commute (your pension value)?
« Reply #6 on: December 30, 2014, 09:34:08 PM »
4. We'll receive two CPPs (both at about 75%) and two OASs. Trying to decide whether to start CPP @ 60 or wait. We won't really need the CPP @ 60, but hey, we can invest the excess.

I used DRPensions Consulting (http://drpensions.ca/) to verify that if I take CPP early it is better for me, as waiting five additional NON-working years just reduces the figure unnecessarily. (and even working longer at part-time has such a marginal impact that I won't be doing that for only CPP reasons...)

As Squawkfox notes, it is necessary to do the 'mathy-math', and I don't have the patience for this (although I built the spreadsheet, Doug Runchey came up with slightly different figures, esp re different leaving date scenarios).  I am more confident in his knowledge of this gov't benefit than in mine.

:)

I've done the "mathy-math" - I'm a CA who likes data analysis and financial modeling, so this is "fun" for me.

I used the methodology information that Doug posted on the "Retire Happy" website ( http://retirehappy.ca/how-to-calculate-your-cpp-retirement-pension/ )  to calculate my CPP benefits. DW will actually receive slightly more CPP than the 75% calculated for me, as she will work a couple of years longer than I did. Given all the uncertainties in these kinds of estimates, I didn't feel the need to be any more precise.

Interestingly, DW will receive "bridging" with her federal pension from age 55 until age 65 - the bridging is supposed to be equivalent to the unreduced CPP benefit she would receive at age 65. She has the opportunity to collect both the bridging and the reduced CPP from age 60 to age 65. Double dipping like this holds a certain appeal.

The decision on when to take CPP is mostly a bet on longevity.  Because of other income streams, the scenarios I've run don't reveal a material impact to our future portfolio balance whichever way we go on this decision, it will probably come down to whether we want to lower our withdrawal rate at 60, versus waiting and obtaining a slightly lower withdrawal rate at 65, or even 70.

We have ~7/9 years before we need to make up our minds, but I'm leaning towards the earliest date.

Al

Al1961

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Re: To commute or not to commute (your pension value)?
« Reply #7 on: December 30, 2014, 09:49:06 PM »
Al - I'm thinking the same thing about the artificially inflated cv right now.

My concern is inflation. I'm not sure I can beat it.  The pension that I am considering to "commute" is entirely indexed to inflation. The pension that I am now contributing to is not.

If the real return is 2% if considering taxes and inflation. So if I have 300,000 at 2% - not so much- the pension payout is better,

But if for some reason the return were to be 5%, the bank of Joan-eh wins.

I've just been reading about dividend growth investing.(DGI)  Interesting was of "avoiding" taxes - which would be a plus for committing the money. If I took the money and did DGI, paid no tax, then maybe I could beat the pension performance on 4%.

Valid concern regarding inflation. I still remember the late 70's and early 80's.

One thing you should be aware of is that the CV calculation takes inflation indexing into account. The CIA standard applies lower discount rates to indexed pensions - substantially increasing the CV payout. Realistically, this adjustment accounts for 2 to 2.25 % inflation over the life expectancy used for the calculation. Pretty much what the pension plan board estimates for it's funding estimates.

You (we) might be out of luck if we get back to inflation in the teens again, but I'm always expecting at least a small real return over the long run.

Then again, DWs pension, CPP and OAS are all indexed to CPI, so I have a somewhat lower risk that hyperinflation will wipe us out.

Al


Cassie

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Re: To commute or not to commute (your pension value)?
« Reply #8 on: January 03, 2015, 01:12:34 PM »
I would do the second choice.

Cassie

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Re: To commute or not to commute (your pension value)?
« Reply #9 on: January 03, 2015, 01:32:17 PM »
I tend to be a worrier Joan.  also our pensions are very solid government pensions where the state has them well funded so we were not worried.

Al1961

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Re: To commute or not to commute (your pension value)?
« Reply #10 on: January 10, 2015, 10:23:39 AM »
Joan-eh?

A) is important. Do you think it will be possible for you to outperform, or at least match, the investment managers of your pension plan? How did the OTPP do in comparison to its stated benchmarks? This should be somewhere in its annual report.

B) You'll most likely be paying a big chunk of tax if you take the commuted value. You can only transfer about half to a LIRA (formula set by legislation), the rest can go into an RRSP only if you have the contribution room. If not, then it's just a taxable payout. At your marginal rate. OUCH.

I think that your options D) and E) are just different aspects of C). It sounds like indexing is important to you, but this pension is less than 25% of your anticipated retirement income. How much inflation protection does this really provide?

Have you run any scenarios with different inflation rates? cFIREsim allows you to pick different inflation rates, or to re-characterize this income as either pension or part of your portfolio. How do various scenarios impact your success rate?

New:
Control. If you take the CV, then you are in control of investment policy, withdrawal strategy, and the cash is there for your spouse should you get run over by a bus. If you take the pension, then you are at the mercy of the Gov't and the Pension Plan Board.

Risk of Plan Amendments. Here in Alberta, the Government tabled legislation last year that, among other things, removed the existing (60% of CPI) indexing for service after a specified date, and substituted a "target" of 50% of CPI indexing - but only in years that the plan could "afford" to index (criteria not defined). The government was pressuring the Alberta Teachers' Pension Plan to follow suit. The legislation died when the legislature was prorogued, but could come back at any time. Could plan amendments like this happen in cash-strapped Ontario too?

The total package of proposed amendments to my pension plan (basically gutting the benefit) was an important consideration in my decision to take the CV.

Al

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Re: To commute or not to commute (your pension value)?
« Reply #11 on: January 13, 2015, 08:24:53 AM »
And don't forget that the pension is clawed back at 65 when they assume you'll start taking CPP.

Joan-eh?

A) is important. Do you think it will be possible for you to outperform, or at least match, the investment managers of your pension plan? How did the OTPP do in comparison to its stated benchmarks? This should be somewhere in its annual report.

B) You'll most likely be paying a big chunk of tax if you take the commuted value. You can only transfer about half to a LIRA (formula set by legislation), the rest can go into an RRSP only if you have the contribution room. If not, then it's just a taxable payout. At your marginal rate. OUCH.

I think that your options D) and E) are just different aspects of C). It sounds like indexing is important to you, but this pension is less than 25% of your anticipated retirement income. How much inflation protection does this really provide?

Have you run any scenarios with different inflation rates? cFIREsim allows you to pick different inflation rates, or to re-characterize this income as either pension or part of your portfolio. How do various scenarios impact your success rate?

New:
Control. If you take the CV, then you are in control of investment policy, withdrawal strategy, and the cash is there for your spouse should you get run over by a bus. If you take the pension, then you are at the mercy of the Gov't and the Pension Plan Board.

Risk of Plan Amendments. Here in Alberta, the Government tabled legislation last year that, among other things, removed the existing (60% of CPI) indexing for service after a specified date, and substituted a "target" of 50% of CPI indexing - but only in years that the plan could "afford" to index (criteria not defined). The government was pressuring the Alberta Teachers' Pension Plan to follow suit. The legislation died when the legislature was prorogued, but could come back at any time. Could plan amendments like this happen in cash-strapped Ontario too?

The total package of proposed amendments to my pension plan (basically gutting the benefit) was an important consideration in my decision to take the CV.

Al


OTPP has done similar to the Alberta plan outlined here. What worries me most is that it was retroactive.  It didn't affect current retirees, only those still paying into the plan, but frankly, there is only so much stripping of their own benefits that working teachers will take before the retirees get thrown under the bus. 

All we need is a PC government, and I'm betting my pension that they will gut our pension plan in the name of austerity. 

I plan to RE in January so as to minimize the tax hit. 

Al1961

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Re: To commute or not to commute (your pension value)?
« Reply #12 on: January 13, 2015, 10:48:09 AM »
I'll just leave this here:

http://www.theglobeandmail.com/report-on-business/pension-fund-managers-protest-being-brought-under-powerful-new-regulator/article22421564/

It's unclear to me whether the ~$230 billion managed by the CPPIB also falls under this proposed legislation.

....

Harper would like to thank all the useless public sector scum you for giving up your pension funds/retirement income to provide the capital his appointees will squander bailing out his banker friends and manipulating the Canadian stock market.

Al

BPA

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Re: To commute or not to commute (your pension value)?
« Reply #13 on: January 13, 2015, 03:58:48 PM »
I'll just leave this here:

http://www.theglobeandmail.com/report-on-business/pension-fund-managers-protest-being-brought-under-powerful-new-regulator/article22421564/

It's unclear to me whether the ~$230 billion managed by the CPPIB also falls under this proposed legislation.

....

Harper would like to thank all the useless public sector scum you for giving up your pension funds/retirement income to provide the capital his appointees will squander bailing out his banker friends and manipulating the Canadian stock market.

Al

ha!  Just got back from a union meeting where this was brought up.  I turned to my partner (who is also a teacher and a union rep) and said, "Well, that just about settles my escape plan."

Al1961

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Re: To commute or not to commute (your pension value)?
« Reply #14 on: January 13, 2015, 06:43:06 PM »
Pension plan assets exist to provide the cash required to settle pension obligations as they come due. It's up to the plan's management to invest those assets in a way that maximizes return (within the stated investment policy) for the plan members and beneficiaries.

This proposed legislation would allow the government to force pension plans to use/invest, not invest their assets for other purposes - i.e. to be used at the direction of government to "manage" risks in capital markets (bailing out banks/insurance companies when the housing bubble bursts?), not for ensuring that the pension plan can satisfy its own obligations.

If enacted, and then used, this could affect all plan members - those currently receiving a pension as well as those who expect to collect one in the future. Will the plan have the liquidity to meet its obligations when assets are tied up by a regulator? How much will future contribution rates increase (for those who are still active plan members) to compensate for any losses/foregone gains resulting from the use of this legislation?

I'm not terribly in favour of the government effectively giving itself the right to appropriate pension assets. YMMV.

Al

BPA

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Re: To commute or not to commute (your pension value)?
« Reply #15 on: January 14, 2015, 03:24:44 AM »
I'm not sure if you were following this story a couple years back: http://www.nytimes.com/2013/12/04/us/detroit-bankruptcy-ruling.html?pagewanted=all&_r=0  It's a bit extreme, but I've had this example in the back of my mind.

Also, I live in Hamilton and have seen what has happened to the retired members of USW Local 1005:  http://www.cbc.ca/news/canada/stelco-pensioners-fear-for-their-financial-future-1.465552 

http://www.theglobeandmail.com/report-on-business/stelco-may-trigger-pension-rule-change/article994631/

The Globe and Mail article is particularly concerning for OTPP because Sorbara and the Ontario Liberals were teacher-friendly at that point.  The Libs certainly aren't now and a PC government would be far worse for us.  Certainly, Harper won't be kind.

The public seems to forget that pensions are delayed wages and that we pay a good deal into the plans ourselves.  We were told by OTPP about a year and a half ago that we would have to face a choice in the future: have benefits cut or fund more of it ourselves without government matching.  As it is, partial indexing applies to payments made into the plan after 2010. 

BPA

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Re: To commute or not to commute (your pension value)?
« Reply #16 on: January 17, 2015, 02:25:17 PM »
Joan:  I couldn't find the date for this blog entry, but there is some interesting information that you probably already knew about, but I didn't.  I should be able to make the "low income" argument for unlocking.  :)  My plan is to live on less than $15k a year in retirement.

Just thought I'd share.

http://www.moneysmartsblog.com/how-to-unlock-an-ontario-locked-in-retirement-account-lira-lrif/

Perhaps Al could comment too since he seems to know a lot about this topic (even if he is in Alberta and not Ontario).

Al1961

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Re: To commute or not to commute (your pension value)?
« Reply #17 on: January 17, 2015, 06:30:14 PM »

BPA! What a strategy! I love it!! It would be nice to just get it all out. And if aiming for a particularly low income especially that year, it sure would be much less tax to pay on he non-lira amount!

I'm a bit confused about the 50% unlocking rule. I have only to 50 years old to commute my pension and I have to apply to unlock within a few months of commuting the pension.  Yet, other rules say I can only unlock 50% at 55 years.  Are their different rules for differnt pensions?

Rules vary based on which government has jurisdiction over the pension plan. In Alberta, for instance, you can do the 50% unlocking of Alberta Jurisdiction LIRAs at age 50. I believe that unlocking simply allows your bank to transfer the unlocked amount to a RRSP or a RRIF. The effect is to eliminate the limitation on the annual maximum that can be withdrawn from a LIRA/LIF.

The unlocking provisions are stackable - if the 50% unlocking leaves a low enough balance, then it can trigger the small balance unlocking....

Ontario may require you to keep the funds in the LIRA until age 55, but at least it's tax sheltered for those years.

Al

BPA

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Re: To commute or not to commute (your pension value)?
« Reply #18 on: January 24, 2015, 06:28:42 PM »
My situation is different than yours, so inflation isn't as scary to me.  I can live on very little and expect to be like my mother and get by on CPP and OAS if necessary.  My mom actually has more money now that she isn't working.  Unlike yours (which is funny since it's the same pension plan) my pension is partially de-indexed, and would be cut another 24% at 65 if I took a pension anyway. 

My plan is to keep three years' living expenses in cash and dollar cost average the rest into index funds.  Plus, I'll have my house which is bigger than what I'll need for just me.  Here's hoping that is enough of an inflation hedge for me. 

After the Bank of Canada's somewhat strange decision to lower the key interest rate, I'm interested to see the difference in commuted value when I check it in early February. 

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Re: To commute or not to commute (your pension value)?
« Reply #19 on: January 24, 2015, 08:43:16 PM »
I've found this conversation very interesting, as my husband and I both have defined benefit non-indexed pensions (in MB).  The effects of inflation are very worrying to me if we're talking about age 50/55 to 90+.  For my husband, it seems that he does not have an option to commute his plan- if he leaves his job, he just starts taking the (very reduced) pension at age 55 at the earliest.  Is this common?  Seems odd to me that he has no choice in the matter.  I can transfer mine to a LIRA.

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Re: To commute or not to commute (your pension value)?
« Reply #20 on: January 24, 2015, 09:34:30 PM »
I've found this conversation very interesting, as my husband and I both have defined benefit non-indexed pensions (in MB).  The effects of inflation are very worrying to me if we're talking about age 50/55 to 90+.  For my husband, it seems that he does not have an option to commute his plan- if he leaves his job, he just starts taking the (very reduced) pension at age 55 at the earliest.  Is this common?  Seems odd to me that he has no choice in the matter.  I can transfer mine to a LIRA.

That does seem odd.  I have a friends who are married and in the same pension plan as me.  He took commuted value and she is taking a pension.  His family is long lived but hers is not.  Seems to me they would have had better odds doing it the other way around.  But really...wouldn't it be nice to have crystal ball.

I'm glad that you didn't get analysis paralysis, Joan.  When I was googling recently, I found a thread on ERE where I posted asking about commuted value in January 2011.  I've been leaning that way for a while, but there are times when I second guess myself.  I just know that I won't be able to make it to 50.  I'm burned out.  I've weighed all of the factors and CV seems the right way to go for me. 


Al1961

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Re: To commute or not to commute (your pension value)?
« Reply #21 on: January 24, 2015, 10:09:54 PM »

After the Bank of Canada's somewhat strange decision to lower the key interest rate, I'm interested to see the difference in commuted value when I check it in early February.

CV is based on three mid- to long-term Government of Canada bonds (CANSIM V122542 - 7 year, V122544 - long-term, V122553 - long-term real return). There may or may not be a correlation between yield changes on these bonds and changes to the overnight rate. These rates are determined only at the end of each month. You can at least see the magnitude and direction of the change here: http://www.bankofcanada.ca/rates/interest-rates/lookup-bond-yields/

Al

Al1961

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Re: To commute or not to commute (your pension value)?
« Reply #22 on: January 24, 2015, 11:00:06 PM »
My calculations lean toward commuting the pension. (Thank you everyone for your ideas - they really helped me examine this from all angles). I like the idea of the control and having the commuted value as a safety net for others after I die. BUT thinking about inflation.  Over 40 years - now until  90years old - how to maintain the buying power? Of course, one needs returns to beat inflation. This money is mostly tied up in non-tangible assets.  Hedging inflation, I don't imagine managing rental properties 65yr +.   When I look at the devastating effects of inflation, i wonder if ER is really within my realm of possibility. Am i missing something?

It has been suggested that if I use 5% as my earnings rate, that I am accounting for the bite of inflation (assuming returns of 7). I do feel 7-8% is (too) optimistic.

What rates ( both return and inflation) did you use when you decided to commute or not?

Joan-eh?:

For me, I used an inflation assumption of 2% and an investment return of only 4%. So a real return of just 2%. My inflation number may be low, but so is the investment return number. At least the Bank of Canada is trying to manage the economy to that inflation number.

BUT, I also ran a sensitivity analysis from 5% real return to -2% real return. My portfolio survived, however the model did not include a sequence of return risk analysis - that was performed separately. I'm personally more concerned with sequence of return risk than inflation, maybe that's just because my wife will have a fully indexed federal government pension (she is too old to take the CV now).

How bad does inflation have to be, and how long does it have to be sustained, to wipe you out?

How does that compare to taking the small(?) indexed pension? (i.e. just how much protection does it really provide you if you use the same inflation scenarios?)

How likely is it that there will be high inflation without high interest rates?

There is no right answer to this dilemma that applies to everyone - you can only find something that falls within your individual comfort zone. For everyone, that's driven by subjective assessments of risks.

I get the impression that your concern about future inflation is leaving you with no comfort zone for taking the CV. Maybe that is the right answer for you, but I think you should run some sensitivity analysis before finalizing your decision.

Al

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Re: To commute or not to commute (your pension value)?
« Reply #23 on: January 25, 2015, 07:41:38 AM »
I've found this conversation very interesting, as my husband and I both have defined benefit non-indexed pensions (in MB).  The effects of inflation are very worrying to me if we're talking about age 50/55 to 90+.  For my husband, it seems that he does not have an option to commute his plan- if he leaves his job, he just starts taking the (very reduced) pension at age 55 at the earliest.  Is this common?  Seems odd to me that he has no choice in the matter.  I can transfer mine to a LIRA.

That does seem odd.  I have a friends who are married and in the same pension plan as me.  He took commuted value and she is taking a pension.  His family is long lived but hers is not.  Seems to me they would have had better odds doing it the other way around.  But really...wouldn't it be nice to have crystal ball.

I'm glad that you didn't get analysis paralysis, Joan.  When I was googling recently, I found a thread on ERE where I posted asking about commuted value in January 2011.  I've been leaning that way for a while, but there are times when I second guess myself.  I just know that I won't be able to make it to 50.  I'm burned out.  I've weighed all of the factors and CV seems the right way to go for me.

BPA -would you mind sending me the link to that other musing in ERE? Only if it's easy.

This was when I was first seriously considering taking it.  I had bad anxiety then and had planned to cash out and move east.  Right now if I took it, I would likely be able to afford to stay in Ontario and moving east is one of my fall back plans.  I'm glad that I've been able to stick it out because I don't think my son would have been as happy going to high school there as he has been here.  He has Tourette Syndrome and ADHD and I think it's really helped him that he's gone to the school that I teach at. 

http://forum.earlyretirementextreme.com/viewtopic.php?t=1988

I'd forgotten until I reread this thread that the OTPP made the decision to strip extended health care benefits for all teachers including ones who had already retired.  I have no doubt that those sorts of strips will continue if the plan is seen to be in trouble. 

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Re: To commute or not to commute (your pension value)?
« Reply #24 on: January 25, 2015, 07:48:15 AM »
GLITCH?!?!

It just occurred to me that a pension can be split for taxes. But all the proceeds from the lira/lif/rrsp must be attributed to me! Right? No income splitting here.   

Opps, I may have missed an important calculation. My current pension will be generous, I have to be aware of hitting the OAS clawback, esp since DH will have much less retirement income attributed to him.

Yikes!  I'm not married so never had to consider this.  Also, there is no way I'd come close to hitting the OAS clawback.  Just curious how much longer you plan to work until retirement?  If you went now would that mitigate the clawback?  Would you take CPP at 60 like I plan to? 

Going earlier and taking CPP earlier are part of my tax planning, but I don't live in as high a COL area as you do. 

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Re: To commute or not to commute (your pension value)?
« Reply #25 on: January 25, 2015, 08:04:48 AM »


I'm glad that you didn't get analysis paralysis, Joan.  When I was googling recently, I found a thread on ERE where I posted asking about commuted value in January 2011.  I've been leaning that way for a while, but there are times when I second guess myself.  I just know that I won't be able to make it to 50.  I'm burned out.  I've weighed all of the factors and CV seems the right way to go for me.

BPA - I am sorry to hear that you are burned out. You have the HARDEST job. It is so draining to spend quality time with kids day in and day out, let alone the prep and marking. When I left teaching youth to teach adults, my new job seemed like half the work. It wasn't - same hours - just a different energy.

If you don't want to quit quite yet, there is always the option of an unpaid leave of some sort. For some people they just need a break and they come back rejuvenated. (I hear it takes about 6 mos to recover from burnout) ....and for others the break confirms that it's time for them to leave the classroom.  I think it's why the 4 over 5 option is so popular. This type of work, especially today, is just not sustainable year decade after decade.  I hear the exhaustion/frustrations in your posts.

Actually I have considered teaching one semester a year.  It's not a bad plan.  At this point, taking CV sounds like a good plan to me.  Interest rates are low so the CV is relatively high.  In addition to that, I don't have a spouse and won't have one (I'm in a long-term relationship where we both agree that we need our own space and won't live together or marry...longest and happiest relationship of my life so far), and if I die youngish my son won't get a lump sum if I wind up taking the pension instead (can't even look to family to get a good read on potential longevity since people die old and young in my family).  When I consider what Al calls "plan amendment risk," I think that going early and taking CV is a good decision for me.  It might not be for everyone, but it is for me.

I still love the kids and would like to volunteer with them, but education policy in Ontario is driving me nuts and the whole union landscape is a bit of a disaster.  There is no solidarity among the affiliates, just hey, how can we screw each other over to get what's best for us and that drives me up the wall.  I've been a union rep for 14 years and find it really maddening. 

I need a change.  I'm thinking of doing the Masters program in Work and Society at McMaster when I finally pull the trigger.  I would find that interesting and I could TA.  I did my undergrad at Mac and think it would be fun to go back. 

GLITCH?!?!

It just occurred to me that a pension can be split for taxes. But all the proceeds from the lira/lif/rrsp must be attributed to me! Right? No income splitting here.   

Opps, I may have missed an important calculation. My current pension will be generous, I have to be aware of hitting the OAS clawback, esp since DH will have much less retirement income attributed to him.

Yikes!  I'm not married so never had to consider this.  Also, there is no way I'd come close to hitting the OAS clawback.  Just curious how much longer you plan to work until retirement?  If you went now would that mitigate the clawback?  Would you take CPP at 60 like I plan to? 

Going earlier and taking CPP earlier are part of my tax planning, but I don't live in as high a COL area as you do.

Retire at 60 likely, I still like my work. Yes, take CPP at 60.  Thats 10 years away -(Otpp makes us decide by 50th birthday) .. but who knows - just moving out of toronto would make us FI.  Nice to have the FU money :-)  I started saving and investing a lot of my salary at age 22 when I got my first job.

BPA, I see conflicting information online. Some places I read that We can unlock 50% of the LIRA portion within 60 days of commuting.  In other places, I read it has to be done at age 55. Have you noticed that?

I have read that it depends at when the pension plan decides a pension can first be taken.  For most public sector workers in Ontario, that's 55.  For us, it's 50.  However, I agree it would be a good idea to get confirmation on that. 

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Re: To commute or not to commute (your pension value)?
« Reply #26 on: January 25, 2015, 08:09:09 AM »
You remind me, that I have to see if I would have access to the health benefits. I'm not sure I do, because my service was so long ago.  Are the potential health benefits with your board or with OTPP?

I think it might be with the board.  However, we are now involved in province-wide collective bargaining, so who knows how that might go?  Our district negotiated away extended health for all retirees in order to keep the retirement gratuity, and then a few years later the government swooped in and imposed a contract on us that stripped the retirement gratuity. 

I have friends who work for TDSB and could ask them what happened there if you like. 

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Re: To commute or not to commute (your pension value)?
« Reply #27 on: January 25, 2015, 08:13:38 AM »
I just sent an email to the OTPP asking about the 50 vs 55 issue.  I will let you know what they say.  Looks like I might be moving east after all.  ;)  At least my son will be done high school then.

ETA:  It's interesting.  I just realized that my anxiety in 2011 had to do with raising a child with special needs and that work wasn't stressing me out.  Since that time changes in educational policy plus things like being involved with a CAS case that went badly and dealing with 6 student deaths in 18 months made work the primary source of stress in my life.  I got counseling, but it's still stressful to remember.  Sweet girl I just adored committed suicide and then five others died after.  It was brutal.  We were in pain and the kids were in pain and I remember an issue where a grieving parent lashed out at a teacher at the funeral home (It's a long story but the parents didn't want the kid to know he was dying of cancer, so they didn't tell the teachers either. My colleague gave him 40% as his mid-term mark because that was what he earned and the teacher had no idea what was going on with the boy.  The teacher said that, of course, he would have given him a passing grade if he had known.)  The media was all over our school after the fourth death and things just got worse when the other deaths happened.  Everything was sensationalized.  The kids didn't realize that the media might twist the truth and use their words to support the twisted story.  They felt violated when pictures of what they thought was private grieving were splashed across the front page of the newspaper thanks to telephoto lenses. 

So, yeah.  I'm tired and burned out.  I love the kids but hate that educational policy is decided by people who have no clue.  I'm not at the point where I'm an ineffective teacher luckily.  I've always told myself that if I feel that happening, I will quit regardless of my commuted value or how close I was to taking a pension. 
« Last Edit: January 25, 2015, 09:04:22 AM by BPA »

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Re: To commute or not to commute (your pension value)?
« Reply #28 on: January 26, 2015, 04:43:00 AM »
BPA,



2b) Have you considered leaving the union steward position? Would it tAke you away from those frustrating issues on a daily basis?  I know someone who did that, and he just focused on his classroom work, he became a "new man"

3) the realization of the origins of stress: My daughter has a health issue and she said last weekend. "I feel normal and healthy today, I'm out of pain".  My reaction was revealing - a huge weight was lifted - even if just for 24 hours. I didn't realize how much it subconsciously affects me - I thought that I had just dealt with it as the new normal.  Of course, coping with chronic illness is up and down, so she is not "all better" - but it was a signal to me. - as I hear you saying too - to be able to recognize where the stress is, is half the challenge of dealing with it.  Indeed you would have underlying normalized worries.

Likewise, I can appreciate the desire to have the cv available to your son. I would make the same decision if I were in your shoes.  Absolutely.  Have a great day! Nice to have sun in January!

So sorry about your daughter.  I do think as parents we often don't fully realize how much "normalized worry" we have. 

The paradox of the union position is that during the past 14 years, I did give it up for two because of stress, but then, having to shut up instead of taking a stand was stressing me out more.  As a rep, I am able to say things that might get me cited for insubordination otherwise.  We are considered equals to the principal when issues come up.  I do have a really good boss now, but sometimes the vps treat staff like garbage and that's when I have to step in.  Luckily, the other union rep is back next week and that will take a lot of responsibility from me.  He's been off for the last semester.  Someone was filling in for him and while she was well-meaning, she didn't know what she was doing and caused some extra stress. 

Yesterday's sun was a welcome change.  Hope you enjoyed it. 

Al1961

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Re: To commute or not to commute (your pension value)?
« Reply #29 on: January 26, 2015, 08:40:55 AM »
*snip*
Al1961, what do you use to run the sensitivity analysis - is the the FIRECALC ?  Or cfiresim? I don't know the terms :-)

I use both cFIREsim and spreadsheets

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Re: To commute or not to commute (your pension value)?
« Reply #30 on: January 26, 2015, 03:26:34 PM »
Joan:  Good news from the OTPP.

"For pension purposes when a member takes their commuted value, the portion of the funds that are transferred to a LIRA is locked-in until age 50."

:D

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Re: To commute or not to commute (your pension value)?
« Reply #31 on: January 26, 2015, 07:35:55 PM »
That's excellent news! So that goes into an RRSP, from my understanding.

Commuted value: 350, 000 for example
100,000 must stay in LIRA
100,000  50% can be  unlocked and moved  to RRSP (somewhat more flexible)
150,000 cash (-50,000 or more for taxes) = 100,000

Did I get that right?

Close. I think you should double check the Ontario rules.

In Alberta, and I think federally, the 50% unlocking is only available at the time you are transferring from a LIRA to a LIF. So you'd have to start withdrawals from the LIF within 2 years. If you don't want to start taking income just leave it all in the LIRA until you do (after all, it's just an RRSP with withdrawal restrictions).

You can also unlock to a RRIF (gives more flexibility on withdrawals, but you have to take the prescribed minimum withdrawal) or unlock and take the cash (and pay the tax). Nothing stays in the LIRA if you do the 50% unlocking.

You only get one shot at this - can't unlock bits and pieces.

Al

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Re: To commute or not to commute (your pension value)?
« Reply #32 on: February 01, 2015, 09:28:32 AM »
Joan:  My CV jumped $52k thanks to the Bank of Canada lowering the key interest rate. 

I'd quit now, but have decided to wait at least until the next BofC announcement in March.  I still need to research which company to trust with investing my locked in portion.  Also, and this might seem greedy, some of the economists with the Big Five banks are suspecting that there will be another rate drop in March.  But mostly I still need to figure out where to invest.  There aren't all that many places that the government has deemed worthy of the LIRA. 

Woohooooo!

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Re: To commute or not to commute (your pension value)?
« Reply #33 on: February 02, 2015, 08:02:55 AM »
Fabulous, BPA!!!   thanks for the update! that sure will be helpful to pay for the taxes on the cash amount!

I have a problem with the pension right now. I wrote an email a week or so ago to ask a question what we were having here --- but instead they gave me a termination package - which will reflect January's CV - ugh!  I will call Monday to have them undo that!!! - and yes, fingers crossed for  March.

Oh no!  Here's hoping that they won't be difficult!  Let me know how it goes...if anyone is working there today.  It's a snow day for pretty much everyone in Hamilton.  Even my brother, who works in the private sector, is home today.

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Re: To commute or not to commute (your pension value)?
« Reply #34 on: February 24, 2015, 05:47:50 AM »
Some of the major banks are predicting another rate drop in March.  TD was one, I think. 

Glad it got sorted out, Joan. 

My friend told me her husband's pension plan is cutting double digit percentages to payouts to current retirees.  After seeing that happen to former Stelco employees and others, I know that I will be taking CV.


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Re: To commute or not to commute (your pension value)?
« Reply #35 on: February 24, 2015, 07:44:58 AM »
Joan-eh?, I chose to pull out my CV two years ago now. If you have  the option to buy back any time before pulling out your CV, ask for those numbers. otpp worked out the scenario for me, and it was definitely worth it. I'm thankful someone at the pension board encouraged me to look into it.

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Re: To commute or not to commute (your pension value)?
« Reply #36 on: February 24, 2015, 07:53:34 AM »
A little part of my worry, is that I see how much time can be taken up with fussing about managing the money or tinkering with overall spreadsheets.  Would a cheque in the mail provide more freedom?

Yes, a few years of equalling the s&p500 for example, puts commuting ahead. If more conservative investing is needed, that's harder to do. Ithing 4,5% Is the Magic number.  But I still struggle with figuring out tax consequesence and inflation.

Is there a particular day that a March cut would be announced? I haven't heard about the possibility since the January announcement, anything recent.?

As soon as you see what you want to live with, ask for the termination package. Then the cv amount is locked in for 6 months.

Good to know about the six month lock in.  I haven't quit yet.  I have to quit and then ask for the termination package. 

Next Bank of Canada announcement is March 4.  The one after is April 15.


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Re: To commute or not to commute (your pension value)?
« Reply #37 on: February 24, 2015, 09:29:35 AM »
The discount rates (there is one for the first ten years of pension payments, and a higher one for pension that would be paid more than 10 years in the future) used for CV calculations are determined at the first of each month.

The discount rates are based on month-to-month market changes to three bond market indexes, not the Bank of Canada rate. They may move in the same direction, but they may not.

Monthly rates for the past however long are here:
http://an-actual-actuary.com/Pension%20Plan%20Interest%20Rates.xls

Columns A-C are the bond rates,
Columns H,I are the discount rates for unindexed pensions, and
Columns M,N are the rates for indexed pensions (will vary based on input in cells N3 and N4 that describe the indexing limitations. The default is 75% indexing for inflation after 1%. If you are fully indexed for all inflation, the inputs are 100%, 0%.)

That was one hell of a drop in rates last month. I'm a bit ticked, since I was locked in at October's rates, and received my CV funds late in January. Oh well, the market returns have been quite good....

Al

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Re: To commute or not to commute (your pension value)?
« Reply #38 on: February 24, 2015, 09:41:32 PM »
Al1961

Sorry to say I'm not learned in these areas of pension lingo. could you explain further this paragraph?

T he discount rates (there is one for the first ten years of pension payments, and a higher one for pension that would be paid more than 10 years in the future) used for CV calculations are determined at the first of each month.

I don't know if I can un-jargon this for you - but here goes.

The Canadian Institute of Actuaries has a standard that determines the interest (discount) rates to be used to calculate Commuted Values. The spreadsheet that I linked above shows the current and historical rates. The discount rates are derived from three different Government of Canada Bond Rates.

The CV calculation is a present value calculation in several parts, with two different interest (discount) rates used depending on when cash flows:

The estimated pension cash flows are mapped out in a time sequence based on when you are eligible to start receiving the pension, and continue until the mortality tables indicate average date of death (so around age 86 for Canadian women).

In the first step, any cash flows that happen more than 10 years in the future from the Valuation date are discounted using the >10 year rate, but only to a date that is 10 years out from the Valuation date. Currently that discount rate is 1.2% for a fully indexed pension and 3.3% for a non indexed pension. (Rates for February 2015)

The second step is to discount the PV balance ten years out (determined in the first step) and any other pension payments in the first ten years to today using the <10 year discount rate. This rate is currently 1% for fully indexed pensions and 1.9% for non indexed pensions.

OK, that was probably hard to follow, so I'll try to lay this out a bit better using some arbitrary dates:

A. March 1, 2015 - CV Valuation date

B. March 1, 2020 unreduced pension payments would start

C. March 1, 2025 "10 year out measurement date"

D. March 1, 2051 Assumed Age 86, pension ends

Part I
All pension payments that would have been made between date C and D are discounted back to date C using the >10 year discount rate. The total of those discounted payments are then discounted back to date A using the <10 year rate.

Part II
All pension payments made between date B and Date C are discounted back to date A using the <10 year discount rate.

The total of Part I and Part II is the CV

I built a spreadsheet using this logic and was able to come within ~$2k of the payout calculated by my pension plan. I believe the difference was due to me using annual amounts rather than monthly amounts specified in the CIA standard.

Al

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Re: To commute or not to commute (your pension value)?
« Reply #39 on: February 25, 2015, 07:09:06 AM »
Joan-eh?, I chose to pull out my CV two years ago now. If you have  the option to buy back any time before pulling out your CV, ask for those numbers. otpp worked out the scenario for me, and it was definitely worth it. I'm thankful someone at the pension board encouraged me to look into it.


I only have 16 years in Otpp . And out of it now, and into a new one for 10 years.

 Is buy back even possible?

Just ask - they'll tell you if you have any time you can buy back. It's common for women who took maternity leave, for example, or someone who took a leave of absence and didn't buy back their pension at the time.

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Re: To commute or not to commute (your pension value)?
« Reply #40 on: February 25, 2015, 05:13:37 PM »
I still need to research which company to trust with investing my locked in portion. 
Questrade has LIRA accounts.

I have about 10 more years till I can pull the plug but I read this thread with interest, as I'm in the Government of Canada's Public Service Pension Plan.

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Re: To commute or not to commute (your pension value)?
« Reply #41 on: April 21, 2015, 05:17:09 AM »
Just checking in : BPA - any news anout the ins and outs of commuting your pension value. Are you still moving ahead with your decision?

That is still the plan.  Who knows what our next collective agreement will eventually be like, but as long as the CV doesn't drop too much from where it is now, I will be out at the end of December?  I'm thinking of going through TD e-series for investing it (a la the Canadian Couch Potato), but will have three years in cash. 

Did you finally get yours?

ETA:  Home prices in Toronto are insane.  Hamilton is getting worse too.  I'm keeping my FIRE options open, but as I've said before, if my cash reserves get low, I wouldn't mind moving east and buying a house for a quarter of what mine is worth here. 

« Last Edit: April 21, 2015, 05:21:38 AM by BPA »

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Re: To commute or not to commute (your pension value)?
« Reply #42 on: April 21, 2015, 06:08:45 AM »
BPA- ahhh, I thought you were leaving this spring.

It seems that I read contradictory infirmation about unlocking 50% of the lira.  i must commute my pension before my 50th birthday (according to the pension rules) , then I see the rule that says  the Lira must be unlocked within 60 days "after December 31, 2010, you transferred money into an Ontario life income fund that is governed by the requirements of Schedule 1.1 and, within 60 days of this transfer, you want to withdraw or transfer up to 50% of the total money that was transferred to the Schedule 1.1 LIF - Form 5.2" and other places I read that we have to me 55yrs old.

Any thoughts?

Not properly caffeinated yet, but I did contact the OTPP and they told me it was 50 for us, not 55.  As for the unlocking, I sure hope I can unlock within 60 days of turning 50, because I have other ideas for that money.  I should try to confirm that.  I wonder if, because I am taking the CV before 50, I need to transfer it out when I put it into the fund even if I won't be 50 yet.  Thanks for raising the question because I had thought that I just needed to wait until I was 50.   

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Re: To commute or not to commute (your pension value)?
« Reply #43 on: April 21, 2015, 06:57:18 AM »
Found this information at http://www.moneysmartsblog.com/how-to-unlock-an-ontario-locked-in-retirement-account-lira-lrif/

If you are 55 years of age or at an age where you would have been eligible for a pension from the originating pension plan (whichever is less) then you can do the following:

    Transfer the LIRA or LRIF to a LIF (Life Income Fund) account. This LIF account will be considered a “new” LIF account. You will have to instruct your financial institution to do this step.
    You are allowed a one-time 50% unlock from the LIF account. This means you can request for a transfer of half the account value to an RRSP or RRIF account or just withdraw the money from the LIF.  This unlock has to be completed within 60 days of the creation of the new LIF account.  Do not delay!

When you complete the unlock, the money is treated as taxable income for that year.  If you transfer to a RRSP, you will receive a contribution receipt which will offset the transfer amount.



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Re: To commute or not to commute (your pension value)?
« Reply #44 on: April 22, 2015, 02:07:09 PM »
Good Intell, Bpa!

I was at the bank to ask more about this process...I seemed to know more than they. That is worrisome.

I'm quite worried that I have not thought of all the implications.


Anyone out there in Ontario, who has  commuted c.v ??

Please help us learn from your experiences. From LIRAS, to unlocking, to taxes, etc...???

I sometimes worry that I haven't thought of all the implications too.  However, staying in this career is really making me unhappy.  I love the kids and the actual teaching, but the extraneous bs is driving me nuts, so I'm out at the end of December even if it means that I have to work again some day because I've missed something. 

I have one friend who commuted his pension right before the crash in 2000ish, so I'm almost afraid to ask him.  He is the reason I plan to have three years in cash and then dollar cost average in the rest.  His experience unlocking would probably not be relevant since the rules changed in 2010.

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Re: To commute or not to commute (your pension value)?
« Reply #45 on: December 29, 2015, 04:31:20 PM »
A bit nervous, but tomorrow I'm submitting the papers to request to commute the pension value!

Final reasons:

Circumvent issues of premature death
Flexibility of withdrawal


Fingers crossed! 

Thanks everyone for your insights, advice and support!

Congrats!  I commuted mine as of last week.  OTPP must be thinking, "WTF? Two of them?  In a couple of weeks?"

It's a good time to take it since interest rates are still low.  I quit, and then two days before my last day of work (the date that counts for valuation for me), the US Federal Reserve raised its interest rate.  My boyfriend was afraid to tell me, but I don't think the US Federal Reserve impacts Canadian pension valuations at all.  The Bank of Canada may not be far behind in raising interest rates.  The value of my pension was pretty solid on December 18.  Not quite as good as it was last January, but still good enough.  I'd been tracking it monthly for over three years and three years ago I would have be ecstatic to see where it eventually landed.

Edited to change "November 18" to "December 18"
« Last Edit: December 29, 2015, 05:46:24 PM by BPA »

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Re: To commute or not to commute (your pension value)?
« Reply #46 on: December 29, 2015, 05:44:50 PM »
I called back in mid November and was told that even if I started the process then, I would receive the commuted value for the 2016 tax year.  I got some contradictory information when I called (for example, twice I was told that the valuation would be based on the day I quit, so if I called in the morning and liked the amount they gave me, I could give my two weeks' that day and the amount they quoted me would be the amount of the commuted value and this was not the case.  I had to hold my breath for a week and hope that it didn't tank in that time.). 

Because all of the paper work won't be processed until 2016, it makes sense that we are safe.  I was told that could take 4 to 6 weeks. 

I only have $18k in RRSP contribution room, so I can shelter that, but yeah...I figure I'm going to take about a $45k tax hit.  I don't plan to make any other income in 2016 or else that would taxed at 46%, but I am hoping to get some sort of other income stream after that.

I will take advantage of the unlocking in 2018 when I turn 50.  No way I'm limiting myself by not doing that.

Yay for us! 

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Re: To commute or not to commute (your pension value)?
« Reply #47 on: December 29, 2015, 08:05:31 PM »
I did mine last January. That is, submitted the paperwork on Jan 5. Tool about three weeks to receive the cash - less 30% withholding tax on the amount in excess of what I could roll into a LIRA. No RRSP room. Had the joy of making a $20,000 installment payment on Dec 15 since the withholding tax was insufficient.

Don't forget to do a dry run on your 2016 taxes so you can determine how much your installment payment, if any, should be. Penalties and interest on un-remitted installments can get expensive.

Al

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Re: To commute or not to commute (your pension value)?
« Reply #48 on: December 29, 2015, 08:52:50 PM »
When I calculated mine out, I should receive a couple thousand back when I submit my taxes for 2016, but I will check that again a couple of times.  This was the website I used:  https://simpletax.ca/calculator

My taxes will be simple for 2016 since I won't be generating any other taxable income.

According to my tracking, January was the best time in the last three years to take CV, so good for you. Al.  Talk about optimization!  If had had gone then, I would have taken home about $11k more after tax, but I really wanted to work to the end of this year. 


BPA

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Re: To commute or not to commute (your pension value)?
« Reply #49 on: December 30, 2015, 06:12:54 AM »
Thanks to you too, Joan.  I referred back to this thread a couple of times over the last few months because what was posted was so helpful.  Not many people commute pensions and, of course, the pension plans don't promote this option.

I also found this article a few months ago:  http://business.financialpost.com/personal-finance/retirement/your-pension-is-now-the-time-to-take-the-cash-instead Interest rates are even slightly lower now than they were when it was written (as we witnessed with enthusiasm a year ago).   

A bit of time off sounds like a good thing.  This would be the time to take it tax-wise.