Cashing your Pension Money
Financial crises have changed the way we look at the pension security. When you leave your job and after the company you had your plan with is sold, merges, changes ownership, …etc, good luck on trying to collect your pension a few decades later…
One of the ways to handle pension if you leave your plan before you retire – is to CASH IT or some call it Commute the value of your pension. What is a commuted value for DBPP?
A commuted value is the “present-day” dollar value of your future pension. It is an actuarial estimate of the amount of money that must be put aside today to grow with investment earnings to provide for your future pension (including survivor benefits and inflation).
Things to consider
- Calculating a commuted value includes estimating how long you will live and how much pension you would receive. Since your actual life expectancy is unknown, this is based on actuarial assumptions.
- At the very least, the commuted value will be equal to your contributions plus interest
- You cannot cash out the entire commuted value of your pension. It usually will have taxable and non-taxable portions, which may have tax implications in the year of transfer. So it is very important to get professional financial advice.
- You may transfer the non-taxable portion of the commuted value to a locked-in retirement account or locked-in RRSP to the financial institution of your choice.
- The federal government sets a maximum transfer amount, based on your age and the amount of pension. If the commuted value is greater than this maximum, the pension plan will refund the excess to you in cash, and you will pay income tax on this amount.
- You may be able to transfer the commuted value to another registered pension plan. Some restrictions apply.
You can't withdraw or unlock your money until you retire, age 50 or 55 (depending on the plan). In most cases, you can only get your money earlier if:
- You can prove real financial need
- You have a medical emergency
In these cases, you may want to transfer the money to a regular RRSP or Registered Retirement Income Fund, so you can spend it if you need it. If you leave the money in this type of account, you can defer taxes until you retire. You only pay tax when you withdraw your savings.
The good thing about locked-in plans is that you're in charge of your savings and you have all the choices when and where to invest.