Commuting a Company Pension
Pension or life income fund (LIF)
Before you retire from a company that offers a pension plan, you’ll need to decide whether to leave the pension with the company or take it with you (called “commuting”). If you decide to commute the pension, it will have to be transferred to a life income fund (LIF) if it’s locked in. If you decide to keep the pension with the company, you would begin to receive income payments at retirement as defined by the plan.
But deciding which one can be difficult because not everyone fully understands his or her options.
Some are drawn to keeping the pension with the company because it represents stability of income (pensions offer you a regular and guaranteed income for life). Some employees fear they won’t have enough income, even if they’re unsure how much is enough. So by keeping assets in a company pension plan, it can offer some a sense of security. How much income you receive will depend on a number of factors: How long you’ve been a member of the plan, your average gross earnings, your age at retirement, to name a few.
On the other hand, you could choose to commute your pension to a LIF. Unlike a company pension, a LIF allows you to choose what to invest in, offering more flexibility with your investment decisions. LIFs are also designed to help you not run out of money because they legislate how much you can redeem each year – there’s a minimum and maximum amount you can take as income. How much income you receive will depend on how much you commute to the LIF, how much you redeem each year and how well the investments inside the plan perform.
If you’re unsure which option is the right one, ask yourself:
· Am I worried I won’t have enough to live the lifestyle I want in retirement?
· Do I have other sources of retirement income, such as personal savings (e.g. registered retirement savings plans)?
· Am I concerned commuting my pension to a LIF will make managing my money more complicated?
· Am I worried about taking control of my assets?
· Is there comfort in having a stable and reliable income or do I want the opportunity to grow my assets?
If you’re still unsure, consider commuting your pension to a LIF rather than taking the pension. Taking a pension means you’re locked in to that decision. There is no opportunity to transfer it later. By commuting it to a LIF first, you can still later decide you would prefer a guaranteed income and then use your LIF to purchase a life annuity.