A defined benefit pension plan is terrible thing to waste, yet many people seem quite open to it.
I’ve been surprised over the years at how many people seem interested in the idea of commuting their DB pension, which means taking the money in a single lump sum to invest yourself. Here’s the latest example: “I am 63 and retiring within the next two years,” a reader recently said in a query sent my way. “I have a DB pension and will have the option of taking the pension or receiving a payout. … As I await my pension options, are there key things I should consider in the decision to take the pension or take the cash?”
For a personalized answer to this question, see a financial planner. I suggest a fee-for-service planner who would charge a flat or hourly fee to provide an answer the reflects your wants and needs. Meantime, let’s look at some of the factors that go into this decision. Someone who already has ample retirement savings may prefer the lump sum rather than the pension because there’s more flexibility in how to use the money. DB pensions are paid monthly for life – there’s no way to make a big withdrawal to fund a trip or put a new roof on your house.
Commuting the pension might also make sense if you were worried about the financial solidity of your employer. The risk is that your employer goes bankrupt at a point in time where the pension is underfunded and cannot meet its obligations in full.
The reason to keep the pension is that it represents worry-free cash for life. Having a DB pension frees you from following the ups and downs of the stock and bond markets. There’s no risk you’ll freak out after a stock market crash and sell at a low point, thereby locking in losses that could have a serious long-term impact on your retirement savings.
The reason to see a fee-for-service planner about this pension question is to avoid the conflicts of interest that can arise when you deal with an adviser who is paid via fees or commissions related to investments. Commuting a pension can put a big whack of money in an adviser’s hands – and yours. Make sure you get an unbiased analysis of whether such a move makes sense.
-- Rob Carrick, personal finance columnist
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Stocks to ponder
Premium Brands Holdings Corp. (PBH-T). When the Canada Pension Plan Investment Board invests $200-million in your company, you know you must be doing something right. That’s what happened with Premium Brands Holdings Corp. last month. Gordon Pape takes a look at the outlook for the stock. (For subscribers).
The Rundown
Rosenberg: With a recession inevitable, now is the time for every investor to hold on to their hat
David Rosenberg takes a look at all the factors that are pointing to a global slowdown and a potential recession – and of course we only can pinpoint the start in hindsight. He outlines the issues and some recommendations for investors. (For subscribers).
Stock-market optimists should take some cues from bond-market angst
One of the best performing investments of recent months has been an obscure Austrian bond that will not pay off its investors for nearly a century. The Republic of Austria bond, maturing in 2117, has jumped nearly 36 per cent in price since early October, easily outpacing global stock markets. This is not because of a sudden outburst of enthusiasm for central European debt. Rather it is because bond prices move in the opposite direction to bond yields, and yields around the world have tumbled since late last year. But there is a complication to this simple story. Despite all the angst on display in the bond market, stocks appear unruffled. It is rare to see financial markets so directly contradicting each other. Even the most experienced observers aren’t sure what to make of it. Ian McGugan explains (for subscribers).
Tips for investing through a trade war
Merrill Lynch quantitative strategist Savita Subramanian published a highly useful report on June 3 advising investors on how to position portfolios in an environment of rising global trade tensions. The strategist included the warning that “things are likely to get worse before they get better.” Scott Barlow takes a look at what this means to Canadians too. (For subscribers).
The time is right for beaten-up Canadian forestry stocks
Are Canadian forestry stocks set for a rebound? Some brave investors are betting that the worst is over, given tentative rallies earlier this week by West Fraser Timber Co. Ltd., Interfor Corp. and Canfor Corp., among others. Nimble investors can point to several upbeat signs for the beaten-up sector, including tumbling borrowing costs that could stimulate U.S. home construction. Shares have also been pummelled over the past 12 months, making the downside risks look relatively slight. David Berman reports (for subscribers).
Mortgages go on sale as bond yields hit two-year lows
Canadian bond yields made a two-year low on Thursday and that’s relevant for mortgage shoppers. For one thing, plunging bond yields are driving down borrowing costs. For another, bond prices and derivatives are a leading indicator of future mortgage rates. And based on those forecasts, you won’t need sunglasses. Mr. Market implies that Canada’s foreseeable economic future isn’t so bright. Robert McLister takes a look at the latest changes in mortgage rates.
Others (for subscribers)
Cannabis firm Beleave acknowledges participation in securities scam
Can the materials sector rebuild after its recent collapse?
Fifteen steady U.S. stocks that can weather a downturn
Beyond Meat top choice for Wall Street after bullish results
Traders betting weak U.S. jobs report will accelerate Fed’s rate cuts
Friday’s Insider Report: This CEO is buying shares of this ‘Big 5’ bank stock
Friday’s analyst upgrades and downgrades
Friday’s small-cap stocks to watch
Thursday’s analyst upgrades and downgrades
Thursday’s small-cap stocks to watch
Others (for everyone)
Bond markets point to recession risks as global trade tensions escalate
Globe Advisor
How would you invest a $10,000 windfall?
Five takeaways from this year’s CIFPs national conference
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Ask Globe Investor
Question: How does pension income-splitting work with RRIFs?
Answer: As long as you are 65 or older, you can split up to 50 per cent of your RRIF income with a spouse to reduce your total taxes payable. What’s more, if your spouse is at least 65, he or she can use this income to claim the pension tax credit, which is applied on up to $2,000 of qualifying pension income.
Even if you don’t want to convert your entire registered retirement savings plan to a RRIF until the end of the year in which you turn 71 – which is the deadline for doing so – it may be advantageous to transfer a portion of the RRSP to a RRIF to take advantage of pension income-splitting and the pension tax credit as soon as you turn 65.
--John Heinzl
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Compiled by Gillian Livingston