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      09-24-2021, 07:50 PM   #1

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Commutated value of define benefit plan

Hi all,

Trust you are well and stay safe.
I have a defined benefit plan with the company I work for.
Some define benefit plan allow a lump sum transfer to a registered pension plan outside the company of your choice.
I read that the commutated value of define benefit plan is more when the interest rate is low. Is it true?
If so, Iíd rather choose the lump sum transfer than a monthly pension.

P.S. I havenít submitted a formal request for early retirement.
I have asked the pension plan administrator about commutated value. But they are not open to respond about it. The pension plan only explains about monthly pension income after retirement. And I heard from colleague who left company that he opted a lump sum transfer.
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      09-24-2021, 08:07 PM   #2

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You’ll have to read the plan documents to get an answer as the specific rules will be in there. You also should check on tax implications. Some lump sum amounts can be rolled into an existing IRA or 401(k) and some cannot (and are immediately taxed as wage income).

Also worth looking at is what happens to the annual payments if you die. In some plans they stop, some have a reduced benefit for a spouse, and some are inherited by the spouse with no reduction. This could be a big factor in taking the lump sum versus the annuity, especially if you have poor health or engage in risky fun.

And to your question on whether the lump sum is bigger when interest rates are lower, that is generally true but again the specifics will be in your plan documents. Most plans are required to make these documents available to any participant that requests them. You may need professional advice to understand them and evaluate your options.
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      09-24-2021, 10:45 PM   #3
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So talk to accountants who are familiar with commuted values, as I recall most require that you commute the value before you turn 50. I looked at it seriously, and for me I like the security of a monthly check for life, oh and if I predecease my wife she get's a check for life as well. There are lots of things to consider with commuting. Generally you'll have to find work for a few years after and invest at a better rate than your pension provider gets, and given they have a ton of cash to play with that'll be tough. If you expect to die young and are divorced then go for it. You can leave your cash to your kids because they generally don't benefit from your pension. But seriously, if you're thinking of doing this, talk to a pension specialist as there are lots of pitfalls. FTR, I've been retired 5 years now with a DBP, I have already taken out more than I put in, my take home is now just a bit more than I retired and I just turned 60. Just some food for thought.
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      09-24-2021, 11:01 PM   #4
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This is a lump sum payout, correct?

I like lump sum pension payouts for two reasons:

1. Investment yields can be higher if the money is in the hands of the investor, and the investor enjoys investing and does it well.

2. Lump sum amounts can benefit heirs. Pensions benefit only the beneficiary and surviving spouse, if that situation comes to bear. It may not come to bear and in that case benefits the beneficiary only.
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