After the high profile bankruptcy of major Canadian companies like Nortel and Air Canada and the resulting decrease of pensions and severance packages received by many former employees, some Canadians are questioning the safety of the employer who is offering their pension. Also noteworthy is the recent bankruptcy of the city of Detroit which has led to the significant decrease of pensions received by retired Detroit public service employees. Although Canada, its provinces and its cities do not have the levels of debt that many US jurisdictions do, it is certainly unnerving to see US government workers retire with a fraction of their expected pensions. My heart goes out to them.

When an employee elects to withdraw their employee pension and invest it within a Registered Retirement Savings Plan (RRSP) or a Locked-In Registered Retirement Savings Plan (LIRA) I recommend a conservative, well-diversified portfolio of stocks and bonds. This spreads the risk of loss around to potentially hundreds of different companies, but does not guarantee a certain return or a specified income. So, in one way it reduces “company specific” risk because the pension assets are no longer governed by the employer, but it also eliminates the guarantees provided by the former employer. An investor will see the value of their commuted value (lump-sum pension amount provided in lieu of an annual pension) rise and fall daily if invested in a portfolio of stocks and bonds. This can be unnerving to some. Sometimes the return on the pension commuted value will lead to an income that is higher than the employee pension offered, but it is possible that it will lead to a lower annual pension amount. One of the benefits of taking a commuted value is the “control” of those pension assets. Within certain limits, an investor can usually access more of their commuted value when they want or need it than if they had maintained an annual pension.

Depending on the elected pension, there can be a decrease or elimination of pension received by the pensioner’s beneficiary when the pensioner passes away and a certain elimination of pension when the beneficiary passes away. However, when a commuted value is invested, the market value of that investment is transferred to the investor’s beneficiary(s) in perpetuity. I have found this to be one of the major reasons why employees elect to withdraw from employee pensions and invest the pension commuted value.

Current interest rates are used to calculate the lump-sum payout offered in lieu of a pension. When interest rates are low, or at all-time lows like now, the commuted value of pensions offered is at all-time highs. This is another significant reason why employees elect to withdraw from employee pensions and invest the pension commuted value.

In the end, this is a complicated decision which can be made simpler by having a conversation with an experienced Financial Advisor.

Information in this article is from sources believed to be reliable, however, we cannot represent that it is accurate or complete. It is provided as a general source of information and should not be considered personal investment advice or solicitation to buy or sell securities. The views are those of the author, [name], and not necessarily those of Raymond James Ltd. Investors considering any investment should consult with their Investment Advisor to ensure that it is suitable for the investor’s circumstances and risk tolerance before making any investment decision. Raymond James Ltd. is a Member - Canadian Investor Protection