This member guide provides defined benefit pension plan members with information about commuted values. Members may be entitled to transfer the commuted value of their pension out of their defined benefit pension plan when they terminate employment. Plan members are encouraged to speak with their plan administrator for further information, and to seek professional advice.
- How FSRA regulates pension plans
- An overview of the retirement income system
- How registered pension plans work
- How life events can impact your pension benefits
1. I want to learn more about the term ‘commuted value.’ What does it mean?
The commuted value of a defined benefit pension represents the lump sum value of all your future pension income today. This lump sum value represents the present value of the future monthly pension income you would otherwise receive for your lifetime upon retirement.
2. What are the transfer options for my commuted value?
When your employment ends, you will receive a statement that describes the pension benefit you have earned under your plan until the date of your termination of employment. The statement will set out the options relating to how you would like to receive the pension benefits you’ve earned during your employment.
In some instances, you might not be entitled to transfer out your commuted value. If you are entitled to transfer out your commuted value and you decide to do that (instead of getting a future monthly pension from your pension plan when you are eligible to retire), then you can elect to transfer your commuted value to:
- another pension plan in Canada provided by a future employer. For this to be an option, your new employer must have a pension plan that allows such transfers. Please check with your new employer.
- a Locked-in Retirement Arrangement (also called a LIRA or a locked-in registered retirement savings plan (RRSP)) at a Canadian financial institution,
- a Life Income Fund (also called a LIF or a locked-in registered retirement income fund (RRIF)) at a Canadian financial institution. This option is only available to you if you are at or near the earliest retirement age in your plan or
- if permitted by your pension plan, purchase a life annuity from a Canadian life insurance company.
The Income Tax Act (Canada) may limit the amount of your commuted value that can be transferred out to one of the options above. If that limit affects your transfer, then the excess amount above the tax limit will need to be paid to you in cash, subject to withholding tax, and will be included in your taxable income for that year. You may have the ability to transfer this amount to a non-locked-in RRSP if you have sufficient contribution room.
3. What happens to my pension if I transfer my commuted value to a LIRA or LIF?
If you are eligible to transfer the commuted value of your pension from your defined benefit pension plan, you give up your right to a monthly pension payable for your lifetime from the pension plan – or to any other benefits from the plan (e.g., survivor benefits etc.). The decision to transfer your commuted value is irreversible. You cannot change your mind after the transfer is effected.
4. What if I transfer my commuted value to another pension plan?
If you choose to transfer your commuted value to another pension plan, your pension benefits will depend on the terms of your new pension plan. Please contact your new pension plan administrator and ask for a detailed explanation of how the amount you are transferring into the plan will be treated. You want to make sure you understand this carefully. Retain records provided by your new plan administrator that show how your commuted value is being treated in your new plan.
5. What is an annuity?
An annuity is a stream of monthly payments paid for the lifetime of the plan member (and possibly also with payments to their surviving spouse or designated beneficiary, depending on the type of annuity you select). The terms of an annuity are governed by a contract, purchased from an insurance company.
6. When am I eligible to transfer my commuted value?
When you terminate employment, or in some cases, membership.
Contact your plan administrator to get information on how your specific pension plan works. There may be some restrictions under your specific pension plan. For example, the option may only be available if you terminate before age 55.
7. I am a member of a multi-employer pension plan. Can I transfer my commuted value?
Special rules apply to members of multi-employer pension plans. Speak to your plan administrator if you are in a multi-employer pension plan. In some multi-employer pension plans, your commuted value may be permanently reduced based on the funded level of the plan at the time that you terminate.
8. How is the commuted value calculated?
A commuted value represents the lump sum present value of the pension you would otherwise receive as a monthly payment for your lifetime upon retirement.
This lump sum value is calculated using actuarial standards from the Canadian Institute of Actuaries (the governing body for the actuarial profession). Your plan administrator calculates this amount using those actuarial standards.
9. How do age and interest rates affect my commuted value?
As interest rates on Bank of Canada bonds increase your commuted value will decrease. Similarly, as the interest rates on Bank of Canada bonds decrease, your commuted value will increase if all other factors remain the same.
For example, changes in the interest rates between February 2022 to October 2023 could result in a decrease in the members’ commuted value of up to 50%. Any further upward movement in the Bank of Canada bond yields could result in further decreases in the members’ commuted value.
Generally, the commuted value will be higher for an older member compared to a younger member with the same pension amount all other factors being equal. For example, a member age 45 will have a higher, commuted value because they are closer to retirement, compared to a member aged 35.
10. Are there other rules I should know about If I am thinking about a commuted value transfer?
Note that in some circumstances, based on the pension plan’s financial status, the pension plan may initially only transfer a portion of your commuted value. If that happens then it must transfer the remaining portion within a maximum of five years. You will receive interest on the portion remaining.
There may be other special conditions impacting your ability to transfer your commuted value, and members should speak to their plan administrator and financial advisor for more information. See Limitations on Commuted Value Transfers and Annuity Purchases (DB Pension Plans) for more information, as well as the Resources section above.
11. What does the term ‘unlocking’ mean?
Money transferred from a pension plan into a locked-in account such as a locked-in retirement account (LIRA) or life income fund (LIF), can only be used to provide retirement income. In this sense, the money is “locked in,” and member access to the funds are limited. The rationale behind locking-in is to ensure that pension plan assets are available to provide you with income in your retirement.
The term “unlocking” refers to the possibility of accessing locked-in money in a LIRA or LIF prior to retirement.
12. Can I ‘unlock’ my commuted value?
There are specific situations when you may be eligible to unlock all or some of your pension commuted value that you transferred out to a LIRA or LIF. Those include certain events of financial hardship (such as certain medical expenses) as well as specific non-financial hardship events (like shortened life expectancy or if you are no longer a resident of Canada). 50% of all transfers to a LIF can also be unlocked within a limited time. Visit Events that May Impact Your Pension for more information on unlocking.
13. What factors should I consider when transferring my commuted value?
Here are some of the most important factors to consider in deciding whether to transfer a commuted value out of a defined benefit pension plan:
- A pension is for life: a defined benefit pension plan is designed to provide members a regular income for life after retirement. By contrast, if you transfer your commuted value to a LIRA or a LIF, you are responsible for investing your money and ensuring it provides you with the income you need in retirement.
- Pension plan features: your defined benefit pension plan may have features that are expensive to replicate, or even impossible, to obtain if you transfer to a LIF or LIRA, including:
- Enhanced early retirement benefits
- inflation protection (e.g., annual cost-of-living adjustments);
- lifetime retirement income for a surviving spouse;
- survivor benefits payable to eligible children;
- a guarantee period during which a certain level of benefits are paid, even if you die during that period; and
- access to other benefits such as insurance and medical coverage.
- Transferring to another pension plan: If you are considering transferring your commuted value to another pension plan, you should consult the terms of that plan. Ask questions. Make sure you understand how your commuted value will be treated under the plan. This transfer decision is irreversible.
- Buying an annuity from an insurer: If you are considering using your commuted value to buy an annuity, you should first get an estimate from an insurer – the commuted value may not be enough to allow you to buy the same pension income that you earned in your pension plan.
- Estate planning: LIRAs and LIFs have specific rules at death which may differ from your defined benefit pension. It is important you are aware of these rules prior to transferring your commuted value. We suggest seeking professional advice to ensure that you understand the differences when planning for your loved ones.
- Taxation: As explained above, as a result of limits in the Income Tax Act (Canada), some of your commuted value may need to be paid in cash, subject to withholding tax, and will be included in your taxable income for that year. We recommend speaking with a tax specialist for specific questions about the impact of any decision on your taxes.
- Investment performance: By transferring your commuted value from a pension plan to a LIRA of LIF, you become responsible for investing the assets. Your retirement income will depend on the performance of your investments. In a defined benefit pension plan, the administrator is responsible for investing the plan’s assets and ensuring that those assets are sufficient to pay pensions to retired members.
- Fees: Discuss the types and level of fees you will be charged in your investment account (in a LIRA or LIF). These fees may be significant. In a defined benefit plan, investment-related fees are paid by the pension fund or by the employer.
Questions to ask a financial planner or financial advisor?
Transferring your commuted value is a significant and potentially financially impactful decision. Consider engaging a financial planner or financial advisor before choosing to transfer your commuted value out of a pension plan:
- Ask questions about the prospective financial advisor or financial planner’s credentials, investment track record and assets under management. Also ask for references and how they’re compensated – for example, if they receive a percentage or commission from the transaction.
- Consider discussing the features and amount of your defined benefit pension benefit, so that both you and the financial planner or financial advisor are aware of the nature of this benefit and its promise to pay out a pension for the rest of your life (and your spouse’s life if applicable).
- Ask the financial planner or financial advisor what level of retirement income you can reasonably expect to receive and what assumptions underpin this (for example, what rate of return is expected, and how long are you being projected to live).