When it comes time to take your pension, you may not realize that you can take a lump sum today or in monthly payments from the company. Opting for the lump sum is called “commuting” your pension and it has pros and cons, especially when the economy may be unsteady. Chris Gandhu, a High Net Worth Planner with TD Wealth, joins Kim Parlee to discuss this Ask MoneyTalk.
Print Transcript
- When it is time to take your pension, you may not realize that you can either take a lump sum or receive a stream of payments from the company starting in retirement. Taking that lump sum is called commuting your pension, and it has its pros and cons.
Chris Gandhu is a high net worth planner with TD Wealth in Calgary. He joins us for this Ask MoneyTalk. Chris, the question is I will be drawing my pension soon. Is it better to take a lump sum or monthly payments?
- Right. So, Kim, let's just step back and see what we're trying to accomplish here, and the pros and cons will become apparent.
So when you're ready to retire, typically your employer will give you an option. They'll say, well, you can take this normal course pension, x dollars per month for life, or here's this lump-sum amount that you can choose to take.
Now, the lump-sum amount really is the dollar value of all of those future payments today. So you can imagine that when interest rates are high, you need a smaller lump sum to be able to generate those future payments. And when interest rates are low, as they are now, you need a larger amount to be able to generate those future payments. So in a low-interest-rate environment such as today, the commuted value could be a fairly significant number, so it's worth considering.
- Are there other considerations? Because one thing I think-- you know a bird in the hand, we know that saying. Sometimes, especially during times of economic unrest-- which I'd say we're getting into right now-- are there are other things you need to consider in terms of taking all the money now or waiting to get regular payments later?
- Yeah, absolutely. First and foremost, you understand that when you take the lump sum that investment risk is now shifted to you. So you have the obligation now to invest it. And if you aren't hands on, perhaps this option isn't the right option for you.
You sort of mentioned the present environment, and I think that post COVID, certainly some businesses will struggle while some will thrive. So if you are taking a normal-course pension, think about whether your employer will be around and be able to fulfill those pension obligations for the next 20, 25, 30 years.
Another thing to consider, Kim, here is that in a normal-course pension-- again, depending on some of the elements that go along with that particular pension-- but typically you'll receive it. There might be a residual benefit for your spouse. But after the passing of the surviving spouse, that said, there is no longer a benefit for your beneficiaries. If you choose a lump sum, the commuted-value option, if you don't use it all, there probably is a part that you can pass on to your beneficiary. So that could be a consideration, especially if you have other assets.
And finally, when you sort of have that option to receive the commuted value, you have to consider the tax cost. Most of it may be tax free to you, but some of it may be taxable. And that, of course, is always going to be a consideration in choosing one or the other.
- Chris, I know you always have interesting insights around other options, so I guess I want to ask you, are there other options? I mean, you've got either lump sum or monthly payments. Is there anything in between?
- Yeah, absolutely. Again, depending on the pension terms, you may have the right to choose part of it to be commuted and part of it as a pension, so essentially hedging your bets, and this may be a fantastic option for many of our viewers. But I would encourage everybody to talk to their advisor because a pension really is a linchpin of your retirement savings. These are big dollars that we are talking about. So get some help in making these important decisions.
- Chris, always a pleasure. Thank you.
- Thank you, Kim.
- All, right and if you have any questions or if you would like to ask MoneyTalk a question, send it to us at moneytalk@td.com with Ask MoneyTalk in the subject line. Ask your question. We'll find the right person to answer it. And you can check on moneytalkgo.com where you can find answers to so many questions about life and money.
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Chris Gandhu is a high net worth planner with TD Wealth in Calgary. He joins us for this Ask MoneyTalk. Chris, the question is I will be drawing my pension soon. Is it better to take a lump sum or monthly payments?
- Right. So, Kim, let's just step back and see what we're trying to accomplish here, and the pros and cons will become apparent.
So when you're ready to retire, typically your employer will give you an option. They'll say, well, you can take this normal course pension, x dollars per month for life, or here's this lump-sum amount that you can choose to take.
Now, the lump-sum amount really is the dollar value of all of those future payments today. So you can imagine that when interest rates are high, you need a smaller lump sum to be able to generate those future payments. And when interest rates are low, as they are now, you need a larger amount to be able to generate those future payments. So in a low-interest-rate environment such as today, the commuted value could be a fairly significant number, so it's worth considering.
- Are there other considerations? Because one thing I think-- you know a bird in the hand, we know that saying. Sometimes, especially during times of economic unrest-- which I'd say we're getting into right now-- are there are other things you need to consider in terms of taking all the money now or waiting to get regular payments later?
- Yeah, absolutely. First and foremost, you understand that when you take the lump sum that investment risk is now shifted to you. So you have the obligation now to invest it. And if you aren't hands on, perhaps this option isn't the right option for you.
You sort of mentioned the present environment, and I think that post COVID, certainly some businesses will struggle while some will thrive. So if you are taking a normal-course pension, think about whether your employer will be around and be able to fulfill those pension obligations for the next 20, 25, 30 years.
Another thing to consider, Kim, here is that in a normal-course pension-- again, depending on some of the elements that go along with that particular pension-- but typically you'll receive it. There might be a residual benefit for your spouse. But after the passing of the surviving spouse, that said, there is no longer a benefit for your beneficiaries. If you choose a lump sum, the commuted-value option, if you don't use it all, there probably is a part that you can pass on to your beneficiary. So that could be a consideration, especially if you have other assets.
And finally, when you sort of have that option to receive the commuted value, you have to consider the tax cost. Most of it may be tax free to you, but some of it may be taxable. And that, of course, is always going to be a consideration in choosing one or the other.
- Chris, I know you always have interesting insights around other options, so I guess I want to ask you, are there other options? I mean, you've got either lump sum or monthly payments. Is there anything in between?
- Yeah, absolutely. Again, depending on the pension terms, you may have the right to choose part of it to be commuted and part of it as a pension, so essentially hedging your bets, and this may be a fantastic option for many of our viewers. But I would encourage everybody to talk to their advisor because a pension really is a linchpin of your retirement savings. These are big dollars that we are talking about. So get some help in making these important decisions.
- Chris, always a pleasure. Thank you.
- Thank you, Kim.
- All, right and if you have any questions or if you would like to ask MoneyTalk a question, send it to us at moneytalk@td.com with Ask MoneyTalk in the subject line. Ask your question. We'll find the right person to answer it. And you can check on moneytalkgo.com where you can find answers to so many questions about life and money.
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