A commuted value is the present-value equivalent of your future defined benefit pension payments expressed as a lump sum. When you leave an employer before retirement, you are typically given the option to take the commuted value instead of waiting to collect the monthly pension.
How a Commuted Value Works
The commuted value is calculated by your plan actuary using your projected pension, your age, and a prescribed interest rate from the Canadian Institute of Actuaries. When interest rates are low, commuted values are higher. The lump sum transfers to a LIRA, with any excess above the maximum transferable amount paid in cash and taxed immediately.
Why It Matters in Retirement
This is one of the most consequential and irreversible financial decisions a Canadian can make. The pension gives certainty and longevity protection. The commuted value gives flexibility and potential estate value but shifts all investment and longevity risk to you.
Related Resources
This article provides general financial education for Canadians. It is not personalized financial advice. For guidance specific to your situation, consider speaking with a CFP professional.