May 21, 2009, 5:00 am

Cash Value Versus The Annuity From Your Pension Plan – Pros and Cons of Each of Them

by: The Financial Blogger    Category: Financial Planning
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Today’s post will end the series about taking the cash value or the annuity from your employer when you have contributed to your pension plan for several years. As I gave a brief description of the two possible scenarios, I will outline the pros and cons of each decision:

What is cool about the cash value

– You get to manage your money as you wish.

– You have full flexibility in regards to payment (withdrawals).

– If you pass away, your fund is being 100% transferred into your spouse’s name.

– Since it creates RRSP contribution room, you should not pay much taxes with the “cash” portion you receive.

What sucks about the cash value

– You better invest your money at the right place if you want to retire someday!

– If you can’t live on a budget, the temptation to withdraw a lot of money early at retirement may jeopardize your lifestyle over the long run.

What is cool about the annuity

– You have a guaranteed income until you die.

– Part of your annuity is indexed according to the CPI (depending on your pension plan).

– The level of income you receive is not according to the past performance of the market but according to your income.

What sucks about the annuity

– When you pass away, your spouse will only receive 50% or 60% of you.

– While your annuity is guaranteed; the guarantor is your employer. You have to make sure that it has the financial capability to pay your pension.

I think I pretty much give all the information about the cash value and the annuity. As you can see; depending on your personal situation, one may be better than the other. In the end, the most important thing is to take the right decision.

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