May 13, 2009, 5:00 am

Cash Value Versus The Annuity From Your Pension Plan – What You Need To Know

by: The Financial Blogger    Category: Financial Planning
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Today we will be looking at a new series 😀 I recently have a case at work where the client quit his job for another opportunity and he had 2 options:

#1 Keep his pension plan at his old employer and receive an annuity at retirement.

#2 Cash value (which is the actuarial value of the annuity as of today).

This is a huge decision to make as it will impact the rest of your life. In this first post about taking the cash value or the annuity I will explain the process of cashing your pension plan.

Do you simply receive a big fat check and you go away?

It’s a little bit more complicated than that. In fact, you will receive TWO big fat check if you decide to cash-in your pension plan. How come? It’s because you have a part that will go in a registered account (that we will look at it later on) and the other part will be non-registered money.

To be honest, I don’t exactly remember why you receive non-registered money that you can do everything with it. From what I remember, it is linked to a portion of the employer’s contribution. What really sucks is that this part is fully taxable in the year you receive it. Therefore, if you receive a check of 50K, you can bet that about 20K will go in taxes (as the 50K is directly added to your existing income and is therefore taxable at your marginal tax rate).

The “real cash” is usually the smaller part. For example, the latest pension plan I looked at was in the amount of 292K split with 236K as registered fund and only 56K in “real cash”.

What happens to your money when you cash in your pension plan?

The 1st part (the biggest one) is directed into a locked-in registered plan. This means that you can’t withdraw money from it until you are fully retired as opposed to a regular RRSP where you can withdraw from it at any time of your life (but keep in mind that withdrawal are taxed according to your marginal tax rate).

At this time, it is now up to you to manage your money properly. You become fully responsible to invest this amount in order to assure a wealthy retirement.

This is why it is important to meet with a financial planner in order to know which situation is best for you according to your investor profile.

Tomorrow, I’ll keep writing about the cash value option. There are additional information you need to know about cashing your pension plan…

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It depends so much on the person’s profile. If they are still horrible spenders, with a lot of debt, I’d be more tempted to have them leave it in the pension. I look forward to your break down.

If you’d be interested in exchanging blogroll links let me know.


[…] in regards to cashing your pension plan or taking the annuity. I started yesterday with the cash value of the pension plan and I continue describing it […]

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I read this article and still had a lot of questions. I think the most important thing is that the pension is for life. A lump-sum payment would have to be annuitized using an annuity to draw a true comparison. For example, I was going to get $1800/month from Constellation Energy upon reaching retirment age. A 7% step up annuity I got from MetLife gave me a $3200/month income at the same age. Therefore, I took the lump sum, invested it in an annuity and almost doubled my monthly retirement income. The advisor at who did the illustration for me said taking the lump sum and annuitizing it has always made more sense in all the situations he had seen.