What does a Commuted Value Pension look like after taxes are paid?

When a Defined Benefit Pension Plan (DBPP) is commuted, there will always be a required tax payment. The reason for taxes is because a lump sum is withdrawn from the plan and paid out as income. These are often large tax payments, depending on the overall commuted value, and need to be considered with all other components.

Here is an illustration based on an actual Commuted Pension after withdrawing from a major corporation’s DBPP.

Client was 50 years of age and had worked for the company for 30 years.

The most favorable pension payments were an immediate payment of $8500/month ($5400 after tax) with a 15-year guarantee. Or, $10000/month ($6800 after taxes) at age 60, with a 60% survivor guarantee.

The Commuted Value

• $900,000 transferred to a LIRA.
• $1,600,000 lump sum taxable payment
• $550,000 taxable severance (about 2.5 years)
• $100,000 taxable cash from future performance grants

After withdrawing $150,000 for 2 years living expenses, paying all taxes, topping up RRSP and TFSA contributions, the client added $2,200,000 to their existing investment portfolio.

We determined the client needed an average annual rate of 3% - 4% to provide a payment comparable to their pension.

Most importantly, many factors and individual circumstances need to be considered when deciding to receive a pension payment or take a commuted value.

Actual dollar values were adjusted and rounded for ease of illustration. 



Thank you and Enjoy your Day.

James Whitehouse