Kathy Clough, CIM, CFP, R.F.P., Portfolio Manager, PWL Capital Ltd., Toronto


Anil, 61, a married and recently laid-off senior bank employee who must choose whether or not to commute an indexed, defined-benefit pension plan. He worked for the bank for 25 years.


If he commutes the pension, Anil would get a large lump sum that would go into a locked-in retirement account (LIRA) if he holds off on withdrawing the money until later, or a life income fund (LIF) if he starts withdrawing now. But taking the pension is a turnkey, immediate solution.


Anil is happy to start retirement now. His wife, Meena, is a teacher and also has an attractive pension. She’s still working, but the couple is supporting two daughters through master’s degrees, so Anil needs to draw income right away.

Anil has a minor heart murmur, and his wife’s benefits cover 70% of his medical expenses. He’d like to claim the rest under the plan that would come with his pension. Plus, one daughter has a thyroid condition that requires daily medication. As a student under age 26, she’s covered under both parents’ plans.

Anil wants income right away, so his choice is between a LIF and the pension. The LIF would let him direct his own investments and roll some funds to a regular RRSP. He could also modify withdrawal amounts to manage around government benefits that have clawbacks, such as OAS.

Both Anil and Meena’s employers took pension contributions off their paycheques, so their investment experience is limited to purchasing real estate—their family home and a cottage. They’re used to being able to see and feel assets, and haven’t yet directly experienced the roller coaster of the markets.

To show Anil what would happen if he chose the LIF, “I’d calculate the investment return that would be required in order to meet or better the pension,” she says. “And I’d explain what kind of asset mix we’d have to put in place to get that return.”

Anil would need to earn 9%, which means a heavy equity weight. He’s the wrong candidate for that approach because he’d be terrified if his LIF fell in value.

His level of discomfort makes the decision easy: take the pension, and the medical benefits and certainty that come with it.

Estate-planning considerations

If Anil dies prematurely, he’s chosen to have his pension drop to 60% and be paid to Meena until she dies. (After Meena dies, the pension will stop.) A LIF lets her roll the funds into her RRSP with no tax consequences. Plus, after both parents have died, any remaining after-tax funds in the LIF go to the daughters.

Anil and Meena prefer to support their daughters’ educations instead of leaving a large inheritance. So the potential estate planning opportunity of the LIF isn’t a driving factor in the decision.

What if?

If Anil were only a few years into his career, in a non-indexed DB pension plan, Clough would have been more likely to recommend he commute the pension.

“The younger the client, with fewer years of service, the less impact it’s going to have on the overall financial plan,” she says. “Chances are better that the client will end up with a bigger [amount with which] to generate pension income.”

What if?

If the pension wasn’t indexed, Anil would risk his purchasing power declining as the years went on. The commuted value would also be lower to reflect the lack of indexing.


The advisor has to understand the assumptions made in calculating the commuted value and be able to run comparisons between the LIRA and the pension.


If the advisor properly explains all the moving parts.

“If they take the commuted value, handle their own investing, and start drawing it right away, they’re taking a fairly substantial risk,” says Clough. If markets perform poorly, Anil’s LIF income would drop lower than what he would’ve gotten from the pension.


Since commuting the pension will result in a large lump sum that’s ripe for investing—with the potential for the advisor to earn sizable fees and commissions—“it is absolutely imperative to declare the potential conflict of interest,” says clough.

Major Canadian banks are solvent and stable, but there’s always the risk a company’s pension may be so underfunded that it doesn’t get paid out. So check the corporation’s financial statements, as well as those of the pension plan, to See if the plan has enough to pay out.