Or should I work another three years and just take my full pension — paid monthly for life — at that time?
A pension plan backed by the Ontario government is more secure than many pensions funded by private companies. Photo by Getty Images/iStockphoto files By Julie Cazzin with Doug Robinson
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Q: I work for the provincial government of Ontario, have 30 years of service and will be 55 next year. I have been investing on my own for more than 20 years and getting good returns. I’m considering taking a commuted buyout next year and investing it in such a way that I can get monthly payments from my non-registered accounts — much like a pension would provide. Is this a good idea? Or should I work another three years and just take my full pension — paid monthly for life — at that time? What are the pros and cons of both? — Thanks, Morty
FP Answers: Morty, this is a good question that many people will find relevant. There are many elements to consider, and each person will value these elements differently. To provide a broad overview and general answer, I have summarized the most common factors you should consider and which side of the decision each more likely leans toward. I will stress that each situation is unique and special circumstances could sway the “checkmark” toward the other side.
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Factors that favour taking the commuted value of your pension now Poor health, bad habits (smoking, etc.) or any risk factor reducing life expectancy. For those in poor health, the commuted value would be favoured. Conversely, good health and a history of family longevity favours taking the guaranteed pension.
Maximizing your potential estate value: If you (and a spouse) prematurely die, there will be money left in your estate. But if you live longer and the investments run out, this option would be worse.
Spending flexibility: You can spend more, or less, in any given year versus a fixed pension.
Tax planning: Greater flexibility can lead to more options, especially if you have other sources of income.
Survivorship risk: On your death, all investments can be rolled to a spouse or common-law partner, so 100 per cent of the income will continue. Standard pensions often only pay 66 per cent to a partner. In some cases, you can elect to have 100-per-cent survivor options on pensions.
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Article content Factors that favour keeping the monthly pension Lifetime income security: Your core expenses should all be covered by guaranteed income. Canada Pension Plan, Old Age Security, and a company pension are such sources, so be sure these meet your basic lifestyle expenses.
Inflation risk: Assuming you are in the Ontario Municipal Employees’ Retirement System (OMERS), your pension plan is indexed to inflation.
Investment risk: All risk is assumed by the pension, so imperfect investment markets are not your problem.
Sequence of returns: The risk that the market declines in the early years of retirement and affects the longevity of your portfolio is the most significant risk you face if you take the commuted value.
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Article content Tax risk: A significant portion of your commuted value will be fully taxable. You lose all future growth on the capital you pay in taxes immediately.
Solvency risk: A pension plan backed by the Ontario government is more secure than many pensions funded by private companies.
Morty, I have identified most of the general issues you should consider when deciding what to do. I encourage you to work through each point with a knowledgeable adviser to make an informed decision. Just keep in mind that most professional advisers have a conflict of interest when advising on these issues since their compensation is linked to the assets they manage.
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Nevertheless, the decision you face will be one of the most important financial decisions of your life, so I encourage you to get some good retirement advice.
The benefits of working three more years are that it will increase your years of service and your average earnings. Both factors will increase your pension and heavily support a decision to wait and draw a pension.
As for investing, I would trust the experts at OMERS over do-it-yourself pensioners. It is great you have achieved strong results over the past 20 years. But I will still bet on the pension experts over the next 40 years, especially as a pensioner’s capacity to make vital investment decisions changes as their health changes.
Also remember that you will likely lose between 10 per cent and 25 per cent of your commuted value to income tax immediately. You will need strong reasons to prefer paying that tax rather than working three more years and increasing your guaranteed pension income.
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With these details in mind, I find myself leaning strongly toward not taking the risks of choosing the commuted value option now.
Doug Robinson is a certified financial planner and wealth adviser with Veritable Wealth Advisory in Peterborough, Ont. Veritable Wealth Advisory is a full-service financial planning and investment firm that employs multiple certified financial planners and portfolio managers with offices in Burlington, Kingston and Peterborough.
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