In the last few financial freedom updates, I talked a little about my spouse leaving her full-time work.  While there was a bit of financial juggling to do, there was one major decision that we had to make with regards to her pension. We had to decide on either leaving her defined benefit pension in place or taking the lump sum (commuted value) and investing it ourselves in a locked-in retirement account (LIRA).

Before making a decision on the defined benefit pension, about a year ago my wife also had a defined contribution pension that was transferred into a LIRA with Questrade.  Transferring that pension was an easy choice as the benefits during retirement were not defined but based on investment returns.  With the high MERs that the provider was charging, it was an easy choice to take the money and invest it myself.  We decided to invest in low-cost index ETFs for that amount.

What is a Defined Benefit Pension?

First for new readers out there, a defined benefit pension is typically offered by government employers and is considered a major benefit of working for the civil service.  In this type of pension, the requirement is that you work in government for 25-30 years, contribute a small portion of your salary towards the pension and in return, you get 60-70% of your working income during retirement (some pensions are even indexed to inflation).  It really is a great deal for employees willing to stick it out with the same employer for the long term.  More details about defined benefit pensions here.

The decision on whether or not to take the commuted value of a defined benefit pension is a bit more involved.  Mostly because the income provided during retirement is defined and for the most part, secure.  There is something about the certainty of regular recurring income that is enticing.

With any major decision like this, I like to review the pros and cons.  For a numbers guy like me, there were also a number of intangible and subjective points to consider.

The Pension Numbers

Monthly Income for Life

I will admit that the numbers made a big impact on my decision.  The pension statement showed at age 60 (about 22 years from now), my wife would be entitled to $7,700/year for life (not indexed to inflation).  While not a huge amount during retirement, it would be a nice guaranteed base income.   But also note that the $7,700/year includes the CPP bridge benefit. This means that the pension actually gets reduced at age 65, but CPP will kick in, so overall income should stay relatively the same.

The Commuted Value

When my wife left her job, she received some paperwork indicating her pension options.  This included:  leave the pension in place; transfer to a new pension (if applicable); or withdraw the commuted value of $54,500.

Due to the size of the commuted value, we had the option to transfer the full amount to a LIRA and avoid paying any taxes – at least until withdrawals begin in the future (55 is the minimum age in NL).

Comparing to an Annuity

A defined benefit pension is essentially the same as buying an annuity.  Both will give you income for life, but you lose the balance once you pass away (some pensions and annuities allow the spouse to get a portion of the benefit).

Using an online annuity calculator, a 60 year old female buying a registered annuity provides about $5,000/year income for every $100,000 purchased.  So to get an equivalent income during retirement, we would need to purchase about $150,000 worth of annuities to generate about $7,700/year income.

What rate of return would I need to turn $54,500 into $150,000 in 22 years (by age 60)? The compounded annual rate of return (CAGR) works out to be 4.71%.  The DIY return required is likely less than this because the pension benefit gets reduced @ age 65, but we will leave that complexity out of this analysis.

So now the question becomes, do I think that a diversified low-cost passive ETF portfolio can at least match 4.71%?  Historic long-term market returns show that returns will likely be higher than this. We also get the added benefit of choosing how much to withdraw from the portfolio and potentially, there is flexibility in how much money is left behind to the next generation.

The Intangibles

While the numbers show that long-term market returns support taking the commuted value of the pension, there are other intangible factors as well that added to our decision.  Some of these factors are specific to the NL pension.

  • Removed health benefits – Some pensions allow pensioners access to medical benefits, which is a huge benefit for an aging pensioner.  The NL government, however, has removed this benefit for those who do not retire with the government.  In other words, if you leave government before retirement age, you will not be eligible for medical benefits even if you keep the pension in place.
  • Control – If you didn’t know already, but when it comes to money, I tend to value control.  With the commuted value, I can choose what to invest in, the amount to withdraw during retirement, and even use a lump sum if needed.  Or, as mentioned above, we could leave a legacy for the next generation.  The idea of the money essentially disappearing after I pass does not settle well with me.

Final Thoughts

A few readers have asked about their pensions and what they should do with them.  I hope that this article helps in your own decision.  If we had a federal pension that was indexed to inflation and provided medical benefits, then we probably would have written an entirely different article.  In addition, if you aren’t comfortable with DIY investing, then leaving the pension intact is not a bad idea.

For me, it was a variety of factors that helped us ultimately make the decision to take the commuted value of the pension.  The main reasons being: we can probably generate a higher income stream from the commuted value with 22 years of compounding at a higher rate of return; we can control the withdrawal rate during retirement which provides flexibility; and, the money doesn’t go away after my wife passes.

Photo Credit:  Mine.  Yes, my art skills are equivalent to a 6-year-old.

Notify of

This site uses Akismet to reduce spam. Learn how your comment data is processed.

Inline Feedbacks
View all comments

Excellent post. I have often wondered what I would (or perhaps will, since I am in my early 40s and have a defined benefit pension right now) do in the same situation. Excellent, straightforward calculation with a logical result. Happy investing!


Nice post. I probably would DIY as well, as the control, the lifetime potential legacy of the capital and, in 22 years, you’ll be able to meet those annualized returns (more than likely). Congrats on this!


Remember that if your wife wants to return to a government job she can still add to that pension and commute it to a different Province if the need arises. Also My medical benefits will be allowed to kick in regardless of whether i am on a deferred pension if there is a life event (my husband loses his job and we now need to be insured). No medical is needed as long as you fill out the proper paperwork with the insurance company prior to leaving the job and keep paying union dues! It’s nice to have control yes but this pension is a gift in a market that may tank the last few years before retirement and that could possibly impact your retirement income! its just another diversification one that has options if you need it down the road!!

I think you made the right choice given the rate environment. The commuted value goes up substantially as the interest rates go down. So with rates where they were when you cashed out, you probably got the biggest commuted value possible.
The annuity numbers you looked at are also based on today’s rates. If rates are to be higher when your wife would actually be 60 (they likely will), then the annuity cost to get that 7700$ annual income would be lower. Which means you don’t need as high a CAGR to break even, or you can get substantially higher income.

If mortality improves more than expected, that will drive up annuity costs even further.

Two questions:
Were you worried at all about the money not being in the pension fund when your wife turned 60 and that is one of the reasons you choose to invest on your own? I am thinking about the Sears pension plan recent problems.

Did you consider leaving the money in the pension fund as a form of diversification because the pension managers would invest differently than you would?

I have a defined benefit pension and will be faced with the leave or LIRA decision in a few years myself but with much smaller amounts.

I am not saying that the government will be going bankrupt or will be in financial trouble one day, but we all know that people who manage public money are not responsible spenders. The governing party can change the benefits if the pension is underfunded or it doesn’t have enough new contributors to sustain the pension. Taking the commuted value is the smart decision. The last thing you want to happen is during your retirement, your pension payments gets cut.

Look no further than the Sears employees pension. Sad story. You never want to put yourself in these situations. I would never put my financial well being in anyone’s hand except mine.

Well thought out decision. The decision to take the present value of a defined benefit pension can be even more compelling if one is a Canadian non-resident. The withholding tax on the taxable payment is 25%. I think all would agree 25% is the lowest tax rate you will ever see! Income splitting (i.e. dividend income) upon repatriation/retirement can net approx. C$33,000 (each) with no taxes payable at present. JCG

I like your approach to this topic. Not just for your own scenario, but the balance you present the argument in, as people seem to be more and more likely to take the commuted value, or at least consider and discuss it. Some have only even heard of it’s existence because of a friend who has told them how they took it, or a Financial Advisor has brought it up to them. In NL, this is especially the case as the Public Service Pension Plan in our province does very little to educate it’s members on it’s existence or how it works, and won’t tell members much about it until they have actually left or chosen to retire. This creates a scenario where people often think of it as this secret that the government doesn’t want you to know about and can create a biased opinion of it before even digging into how it applies to a person’s individual situation.

People often take the advice of friends and co-workers that have already made the decision for themselves, but the issue is that the conversation typically doesn’t go into the specific financial details about why a person chose one option over the other, which leads to biases and potentially bad decisions. This article works because it goes into what makes the commuted value right for the individual, and provides not only the thought process but also a transparent view of the author’s financial situation to see how each component functions for their situation.

A professional can help outline how the different factors may affect you, but nobody should state that one is definitively better, as the definition of the commuted value is that it is the economic equivalent to the future income stream.
There is an issue that people should be aware of, this isn’t a short coming of the commuted value itself, but many Financial Planners, Advisors, Investment brokers etc. are specializing in these discussions, however they have a vested interest. Realistically, if someone is commission based, they need to you to take the commuted value to earn a commission on that investment. This doesn’t mean that all of them will push you into it, but they should be letting you know about this potential conflict of interest, and many aren’t.

It is extremely important to have an open discussion about a topic like this, as it is a massive decision for a lot of people, and it’s a one and done type of decision. There is no going back.

Good choice MDJ. I also think you got the highest possible commuted value given where rates are now. I would also agree on the control and flexibility part of the decision as well.

Thanks for sharing! This post actually gave me some great ideas for a similar scenario I’m currently looking at. Cheers!

I have to make a decision on my defined benefit. I can take some of it $55K and put in a Lira. But the remainder $40K can only be paid out as cash so will be subject to tax. Does it make sense to take it out when it has a high cash component to be taxed?

Thanks for the balanced approach FT (as always) to something that requires a solid decision! I have a defined benefit pension as well but have no plans to quit completely anytime soon so I’ll keep contributing to it. I must admit I like the benefit statement when it tells me how much I would have per month/ if I stayed put and left money in the plan. I wouldn’t have thought to ever take money out of the plan but reading this post will bring it to my attention when the time comes for me to quit my job :)

P.S. I like the artwork, nice touch!

Thinking of retiring in a year or so. Ontario Pension Plan is good but still not sure which way to go. Went to a pension info session and they did not even once mention about commuted values. The pension is indexed but no medical.

The advantage of taking it out is covered in one of your last sentences which some people may have missed. When you die the money is gone (assuming you did not take spousal benefit or you don’t have a spouse). Exactly that happened to a friends father. He retired after 35 years. His wife was still working and also had a pension at her work. So they did not take the spousal option. A year after he retired he died and no pension money after over 30 years of contributions. At least a LIRA can be left to anyone.

The whole purpose of a DB plan is to spread the mortality and investment risk over a pool of people. Some people die early, some die later. If your friend had commuted to a LIRA and lived to 100 he could have risked outliving his income. They made a choice to not take the spousal option, and it resulted in a higher annual pension (and probably the right choice at the time since the wife had her own plan).

Good article with some analysis! My question to you FT is, the commuted value of $54.5k that was presented to you, did they provide the details of how this was calculated? And did you feel it was a fair amount based on how much was contributed to the fund? I will hopefully be facing a similar decision in a few months and my biggest worry is that the fund will try and short change me if I take the commuted value.

it depends say you are getting close to retirement in the next 2-4 years a pension of 2k per month not indexed to get that you need just over 1 million a year in the bank (bonds no risk) so if you take a buy out of cash there is no way they will give you a million dollars they will give you a lot less so now you have to take risk with say 400k (example only) to try and get that 2k per month. So sticking with company pension is better?

Poor decision. You have simple done a reverse risk arb and placed the risk on your own shoulders instead of the company’s. You have determined the risk-free interest rate of the pension to be ~4.8% whereas the true risk free rate is much closer to 0%. If this is a government pension then you have truly handicapped yourself by 5% annually.

Evan, does the “poor decision” statement apply to the assumed rate of return of the decision to transfer out of the DB? Because I see more than just the amount of dollars playing a role in the decision, for example, if the couple dies after the DB’s guarantee period (typically 5, 10 or 15 years – the longer it is, the lower the monthly pension), then nothing will be going to their children or grandchildren, or perhaps even their favorite charity. The self-managed route should also provide some flexibility in how and when the money is utilized, whereas once you start drawing from the DB, that’s it for life.
Further, the Sears pensioner’s issue shows that DBs are not 100% guaranteed, perhaps they are to around 80% today, but lobbying by big business to relax such controls is relentless.

I did the exact same thing and my DB was considerably higher. I came to the exact same conclusion and for me it ended up even better. I had to transfer a max amount to a locked in RRSP which was about 128K. That alone at 5% would exceed the value of my DB assuming i had retired at 60. On top of that, because my commuted value was more, I received a significant cash payout of which i maxed out my RRSPs to reduce my taxes. Even after taxes, I came out like a bandit with significant cash today and enough in my rrsps to equal what I would have received. I spent hours going through the numbers and receive two independent opinions. It was a tough decision, but its been a year now and I look back and would make the decision 10 times out of 10.

Hey, just started reading your blog – awesome info here. An old co-worker of mine recently did the same thing with her DB pension. She had almost 30 years of service paid into it, and would have received about $5000/month in pensions but she took the commuted value only a few months before she could retire. She took home about $750,000 from the pension plan. I’d say it’s a great option if you’re comfortable with DIY investing or have a good adviser.

Thanks so much for this post! I am actually in the exact same situation. Contributing to PSPP for last 4 years. I probably have around 60 K (my own contributions) and planning to leave later this year for a job in the US where I will be a permanent resident. So kinda planning to stay there for a while if I like it.

Questions for you:

– my employer matches 100% but I have never seen their contribution on my statements so does this mean you only get it if you keep your contributions in the same plan and then ultimately get both your contributions and your employer
‘S at 65?
that would mean that I don’t have 60 K but 120 K and it makes a big difference
– now, I had to deal with PSPP 2 years ago and their customer service is absolutely atrocious so I am having a hard time trusting them considering than I am only 30. It means leaving my contributions for the next 35 years and then hoping to get it back. I absolutely don’t trust them on this.
– knowing that I may leave for the US, is it a good idea to leave my money to PSPP?

What would you recommend?


I am in AB and indeed vested after 2 years.

I will indeed wait for my statement to see what I will do then but I feel like I will take my own route to invest this money :-)

Thanks so much for this post!

Lisa, are you part of the federal Public Service Pension Plan? If so, you should be able to use online pension tools to get estimates on commuted value (or transfer value). The transfer value can only be calculated/estimated within 3 months of proposed departure date (due to fluctuating interest rates). Hope this helps.


I am part of the Public Service Pension Plan (in AB) and their website is absolutely ridiculous. It’s not even up to date so the amount you have there is usually updated once a year or once every 2 years. (They actually sent us a statement from 2016 this year…)

The only option I have is the projection calculator.


Just wanted to let you know that I took the commuted value and now waiting for the transfer to my LIRA. I chose RBC because the easiest thing to do for me but I will probably end up transferring everything to Questrade or similar at some point.

Also for people who are interested, you can absolutely keep a LIRA and a RRSP when you go live in the US and become non resident. You won’t able to add any more money to your RRSP but the money will still grow :)

Hi, I’m having to face this situation myself and would like your opinion. The commuted value of my pension is $444,000, of which $90,000 would be taxed, if I took it out. It is a DB plan, which would pay $3200 a month, if I left it with my former employer. I don’t believe it’s indexed and there are no medical benefits attached. I would have 15 years to make the investment grow before drawing from the funds. Should I take it out? or leave it alone?

This is just the article I was looking for! I’m facing the same decision shortly where I am planning to step back from my full-time position as a nurse and wondered what I should do with my pension.

I’m in favour of taking the commuted value because I think I can make it grow more than if I had left it sitting in my pension. I didn’t like the idea that the money would disappear after I die (never mind if I die early). And although the pension does transfer to a spouse after I die, because I’m a woman, I anticipate living longer than my future husband. I also like the idea of more control and possibly leaving unused money for the next generation.

I have had people telling me not to do this however… they told me it would be insane for me to give up my defined benefit pension – these people are other nurses and some financial advisors.

Hey FT,

I should mention I live in Canada so I didn’t have to worry about accounting for my healthcare needs when I retire.

However I appreciate the insights you provided. I am sometimes impulsive in my decisions instead of taking the time to do my due diligence.

When the time comes and I give up my permanent position, I’ll receive a document from my pension outlining what my options are. I’ll have more info then to help me make a decision once I find out the commuted value (I’ve only worked for 4 years at my current job).

I do like the idea of keeping it as my fixed income/bond fund and then be more aggressive with my other accounts! Thanks for this suggestion :)


Hi, Thanks for the post. It is really informative. I’m facing a similar situation myself and would like your opinion. The commuted value of my pension came up to be around 25% less than sum of my contributions and my employer contributions and I wonder if it is right?

HI FT. We just found your blog today and are excited. It’s so nice to have a fellow Newfoundlander who can offer advice on things like this. We are in the unique position that my partner can retire in 1. 5 years but I still have 17 years left. He works for the provincial government and I’m a teacher. The goal ideally for us to be both FI in 10 years. We are investing in ETFs using Quest Trade, reducing our expenses and taking on side hustles (in retirement) so we can spend quality time together and have similar schedules.
We are leaning toward my partner taking the commuted value of his pension. He would receive $33000 a year before taxes if he takes the pension. We have really no idea what he would get if he takes the commuted value at this point. We also have TFSAs and some money in RRSPs and rental properties. I also have an RDSP that I can draw from at 60 and if I deffer my pension, I can start receiving it at 62.
Do you think, given our circumstances (he’s 51 and I’m 36) that it would be a good idea to take the commuted value of his pension in an effort to be FI in 10 years? Thanks!

Hi FT! Thanks for the quick reply!
I think his main reason for wanting to take the commuted value is that he hates the idea that when he dies, the pension is gone. He has had some health issues in the past (luckily he is well now) and thus his outlook on things has changed. If he takes the commuted value, the money that he has put into it stays in the family.
As for the medical portion, he can be added to mine once he leaves and then if I leave teaching, we would have to make a decision on what to do I guess. I may not fully leave teaching, but instead work part time or sub. He also intends to keep working, but at something else following his retirement. He is pretty burnt out from his current job and would like to leave sooner rather than later. He is fit and active so he definitely won’t want to fully retire. I guess we will have to wait and see how the numbers work when the time comes and see if it makes sense for us. Thanks for your help and we’ll keep reading your blog!