[Doris]

I have a small pension from a company I worked for years ago. I never paid much attention to it but I now realize I may have been wise to move it to another plan, because the value has never changed as it is not indexed. It will not be indexed until one year after I start drawing a pension income. No point in kicking myself, but I’m wondering if I should do something about it now.

My age: 51

Option 1
Monthly pension: $286 per month from 2020 (age 62)

Option 2
Early Pension: $206 per month from 2013 (age 55)

Option 3
Transfer of $32,830 to a locked in arrangement and receive $6100 cash now
Note, I am a Canadian but not resident here so my transfer options could be limited.

I am wondering if it would be sensible to move the lump sum to a fund that has potential to grow or just leave it alone now as I am not that far away from drawing the pension.

And if I should leave it as is, should I start drawing the lower sum in 2013?

 

[OhGreatGuru]

Because of your proximity to retirement age, I suspect you are better off leaving it where it is. Looking at it simplistically, to generate $206/mo. you would need $49,440 at 5% interest. So you would have to achieve a 50% return on investment in 4 years to achieve that.

Looked at another way, if you invested at 6% (reasonable long-term return for a conservative balanced fund), your $32830 would be worth about $41.5K in 4 years. At 5% (generous for GICs at present) it would only generate $173/mo. at age 55.

I suspect you are better to take the early pension. Taking it later would allow you to invest in something longer-term that might return 7-8%, so the monthly payout at 62 might be a little higher. But you would be foregoing 7 years of guaranteed monthly pension payments ( total of $17,304), and I think it would take a long time to make that up. But you can make some simple spreadsheet calculations to try various scenarios.

PS: The above presupposes that the pension fund is secure and actuarialy sound. If you have any reason to suspect otherwise, take the money and run.

 

[leslie]

You cannot compare a pension directly to what could be earned with the cash invested because the pension come with longevity insurance - it does not run out until you die. Nor does it have investment return risk. It also protects from inflation risk.

You should compare the pension against what you would get from a personal purchase of an annuity. You can look up rates but they will not give indexed quotes or deferred quotes:
http://www.ifid.ca/payout.htm
http://www.canadianbusiness.com/my_money/rates/index.jsp
http://www.globeinvestor.com/servle...SL&sex=M&fund_type=N&province_of_residence=ON

Add $32,830 plus $6,100 and divided by $100,000 to prorate your purchasing power. Multiply by (say) $650/month as the going rate and you get $253/mo. That is pretty much what they are offering in 10 yrs.

If you took the cash you could grow the principal for another 10 years at which time interest rates could be higher and you might be able to buy more annuity with the cash....but then an indexed annuity will yield WAY lower monthly payments.

You control for that by getting an annuity quote from any insurance agent for an "indexed annuity with payments deferred 10 years". Use that quote in the math above to make the comparison. Don't let them fob you off with an annuity that increases its payments by (say) 4% a year. Indexing is about offloading inflation risk ... the risk that the unknown will differ from the expected (say) 4%.

I would bet the result will be that it is simpler to just let it be and collect the pension UNLESS THERE IS A POSSIBILITY OF THE COMPANY GOING BUST.

 

[OhGreatGuru]

I omitted the $6100 in my calculations, which would change the numbers a bit. But investing that $6100 would be in a taxable account, so its net return after taxes would be lower. And as leslie points out it's a bit of apples & oranges to compare these returns to a pension. Returns on annuities are closer to the mark, but harder to get numbers for. But we agree you are probably better off leaving it provided the pension plan is secure.

 

[Doris]

Thank you both Guru and Leslie,

I don't think I will take a chance on investing the money myself as I have tried investing funds in the past and have had mixed success. I should probably have done it years ago but as I am now only a few years away from taking the early pension I am sure you are both right, I will probably be better off leaving it alone for now and then take the early pension.

Thanks again!