Pension commuted value calculator: what the lump sum could become
A pension commuted value is the lump sum your pension plan offers in place of the monthly pension it promised. This calculator takes that lump sum, subtracts the tax you expect to pay on it, and projects what the rest could grow to at your expected return. With its starting values, a $500,000 commuted value taxed at 30% leaves $350,000, which grows to about $1.12 million in 20 years at 6% a year. It does not value the pension you would give up, so read it beside your plan's own statement.
Pension commuted value
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How to use the commuted value calculator
Enter four numbers and the projection updates as you type. Your inputs are kept in the page address, so you can bookmark a scenario or send it to your advisor.
The lump sum on your pension plan's termination or retirement statement. The starting value is $500,000.
The share of the lump sum you expect to lose to tax. If most of it can move to a locked-in account, the tax today may be far lower than your marginal rate; if you take it as cash, it can be higher. The starting value is 30%.
The average yearly return you expect on the invested lump sum. The starting value is 6%.
How far ahead to project: 10, 15, 20, 25 or 30 years. The starting value is 20.
How to read your result
The calculator answers one question: if you take the commuted value, what could it be worth later? It does not compare that with the pension.
After-tax lump sum
The headline is the commuted value less tax at the rate you entered, with the tax shown beneath it. This is the amount the projection starts from.
Final projected value
What the after-tax lump sum grows to by the end of the projection period, compounding once a year at your expected return. It assumes no withdrawals and no tax on the growth along the way, as in a locked-in or registered account.
Year-by-year growth
The chart traces the balance from year 0 to the end of the period, and the table lists each year's growth and closing balance. Projections over 30 years show the first 15 and the last 15 years.
What the result does not show
The calculator does not value the pension itself: income for life, any indexing, and any survivor benefit. A larger projected balance does not by itself mean the lump sum is the better choice.
Commuted value or monthly pension
Keeping the pension gives you income for life, so the plan carries the investment and longevity risk. Taking the commuted value gives you control of the capital and what is left of it for your estate, and moves those risks to you. Which one fits depends on your health, your other income, your spouse and how you feel about market risk.
Part of a commuted value can usually move to a locked-in account without immediate tax, up to a maximum set under the Income Tax Act. Any amount above that is paid to you as taxable cash unless you have RRSP room to shelter it. Commuted values also move with interest rates: when rates fall, the lump sum offered for the same pension rises.
The choice is usually permanent once made. How much you need to never run out of money covers the longevity side, and retirement planning in Calgary with Kaetyn puts both options into one plan before you sign.
Pension commuted value questions
Answers drawn from the calculator's own rules and assumptions, and from the CRA.
It is the lump sum a defined benefit pension plan offers in place of the pension you have earned, usually when you leave the employer or retire. The plan works it out as the present value of the pension it promised.
Part of it can usually be transferred to a locked-in account, such as a LIRA, without immediate tax, up to a limit set under the Income Tax Act. Any excess is paid in cash and is taxable in that year unless you have RRSP room to shelter it. Money later withdrawn from the locked-in account is taxable income.
The commuted value is the present value of future pension payments, worked out with interest rates and life expectancy assumptions. Lower rates mean a larger lump sum is needed to pay the same pension, so commuted values rise when rates fall and fall when rates rise.
It is a simplified projection for educational purposes. It applies one tax rate to the whole lump sum, assumes a steady return with no withdrawals, and does not value the pension you would give up. Actual tax depends on your other income, your province and how much moves to a locked-in account.
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- How much do you actually need to retire in Canada? Pensions in the plan
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