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Should I transfer my defined benefit pension to a locked-in retirement account?

March 25, 2011 - 2 comments

This question came up recently as I met with a client who is about to retire, at age 60, after 30 years of employment.  While not a government job, with an associated blue chip defined benefit pension plan, the plan is reasonably good, with some built in indexing.

The option to take the “commuted value” instead of an on-going pension is available and the client is having difficulty making a decision.  The commuted value essentially represents the amount of funds that would be required today to provide the defined benefit pension for the client’s lifetime.  It is obviously based on actuarial assumptions regarding anticipated life expectancy and investment rates.

The client has heard that there are strong benefits in taking the commuted value – estate planning opportunities, the potential to improve the amount of “pension”, having more control over the assets, not having to worry about the funding and status of the defined benefit plan.

At this point, the client has no plans to seek other employment or consulting work, so an immediate income stream will be required.  The defined pension amount will just cover the client’s lifestyle needs. In addition, as a pensioner, retiree health and dental benefits can be purchased at reasonable group rates.

Because of the defined benefit nature of the plan, the client has had limited ability to make RRSP contributions.  Consequently, there has been limited investing experience and  substantial amount of personal real estate is included on the net worth statement. 

The client felt overwhelmed with the decision being faced.  However, as our discussion progressed, the following became clear:

  • Lack of experience in investing also meant a lack of confidence in making investing decisions
  • A downturn in the LIRA’s portfolio value would cause the client to lose sleep
  • A chronic back problem means the client requires regular physiotherapy.  If benefits were not available, treatment may not be sought because of the cost.
  • There is not a strong desire to leave a large estate – children have been educated and are on successful paths.  The primary objective is to ensure the client will not be financially dependent on children.

By the end of our meeting, the client had decided to stay with the pension plan and begin to draw the pension – a decision I encouraged.

This may not always be the case – a younger client, with fewer years of service and a number of years before retirement may make a decision to accept the commuted value. 

As in so many financial planning questions, there is no “one answer fits all”!

By: Kathleen Clough with 2 comments.
  13/09/2011 12:43:34 PM
Kathleen Clough
As indicated in the article, I agreed with the client's decision to keep the defined benefit plan. However, I think there are a few situations, as mentioned, where a LIRA might make sense. Always subject to the client's circumstances and ability to take risk.
  13/09/2011 6:40:17 AM
Pension Funds
No You should not transfer your defined benefit pension to a locked-in retirement account..Yes You have limited ability to make RRSP contributions..But defined benefit pension is more safer than locked-in retirement account

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