Page 137 - A Canuck's Guide to Financial Literacy 2020

137

o Transfer the pension amount to their new employer's pension plan if
applicable
o Transfer the amount to a locked-in account such as a Locked In Retirement
Account (LIRA) or Locked In Registered Retirement Savings Plan (LRSP)

Transfer into a Locked-In Plan

▪ There are two significant advantages to having your pension benefits
locked-in:
▪ You will have a regular income at retirement
▪ Creditors cannot seize locked-in pension money.
▪ Keep in mind that the money can be accessed if certain exceptions
are met

Commuted Value of Defined Benefit Plan

The commuted value of your pension is the lump sum present value of your expected future
pension plus related benefits. The discussion of commuted value usually arises when the
plan member is terminated, passes away or a breakdown in a conjugal relationship occurs.
Note that a commuted value is only applicable in the context of a defined benefit plan.

As an example, let's assume that a 50-year-old plan member is terminated and he has to
make a decision what to do with their commuted value. Leave it in the plan or take the
commuted value.

A. Pension – An annual pension of $38,570 starting at age 55
B. Commuted value – A lump sum amount of $488,562.34

The plan members decision and course of action has different consequences.

Withdrawing the Commuted Value

If a plan member elects the commuted value option, they would have to transfer this
lump sum in a Locked-In Retirement Account, a Locked-In Retirement Savings Plan
or purchasing an annuity. The individual or their advisor would be responsible in
making sure that this lump sum amount is invested in a suitable product solution that
would provide a stream of income in retirement.

Choosing the Pension

The plan member could choose to leave the commuted value in the plan but they
should be aware of the solvency ratio of the pension plan, especially if the company
is private. A promise of a future pension is only as strong as the company itself.
100% solvency ratio means that the pension is funded and can meet its obligations.
A plan member should also be aware if the pension is indexed to cost of living or