Should you commute your pension? What to know when leaving a job

Leaving a job – whether you chose it or not – often means facing some big financial questions. One of the biggest? What to do with your pension.

If you’ve been part of a workplace pension plan, you’ll need to understand what kind of plan you have, and what that means for your next move.

First, know your pension type

There are two main types of employer pensions in Canada: Defined Benefit (DB) and Defined Contribution (DC).

A Defined Benefit (DB) plan promises you a predictable monthly income in retirement. That income is calculated based on a formula – usually your salary and years of service. Your employer takes care of the investment side and bears the risk. When you leave your job, you may have the option to keep the pension in the plan or take the commuted value as a lump sum.

A Defined Contribution (DC) plan works more like a group RRSP. Your employer contributes to your pension account, often alongside your own contributions. When you leave your job, the value of your DC plan is yours – and you can transfer it into a Locked-In Retirement Account (LIRA). You won’t have the option to “commute” like you would with a DB plan, because there’s no guaranteed monthly payment to convert. The retirement income you get will depend on how your investments perform.

So if you’re hearing the term “commuted value,” it likely means you’re in a defined benefit (DB) plan. And that’s where the big decision lies.

What is pension commutation?

To “commute” your DB pension means to take the lump sum value of your future pension payments now. Instead of receiving monthly income from your employer’s plan when you retire, you’re given a present-day amount based on what your future payments are worth today. This option is typically called commuting your pension to cash, or you may also hear it referred to as “cashing out” your pension.

The lump sum commuted value of your pension can be transferred into:

• A Locked-In Retirement Account (LIRA) (up to the CRA maximum)
• A Registered Retirement Savings Plan (RRSP) (if you have contribution room)
• A taxable investment account (for any excess above the CRA limit)
   

This choice gives you control. But it also brings complexity.

If you have a DB pension: Your two main options

Option 1: Leave your pension in the plan

This means you’ll receive a steady, predictable income for life when you retire. The amount is set by the plan’s formula.

Pros:

• Predictable lifetime income
• No need to manage investments
• Lower stress in retirement
   

Cons:

• Limited flexibility
• May not fully keep pace with inflation
• Limited or fixed survivor benefits
   

Option 2: Commute your pension

You receive the lump sum value of your pension today, and it’s yours to invest and manage going forward.

Pros:

• More control and flexibility
• Potential for greater growth if invested wisely
• Opportunities for tax planning and estate planning
   

Cons:

• You bear the investment risk
• Part of the lump sum may be taxable right away
• You’ll need a disciplined withdrawal strategy to ensure it lasts
   

If you have a DC pension

Things are a little more straightforward. You already “own” the value of your DC plan, and when you leave the company, you can transfer it to:

• A LIRA, if the funds are locked-in
• An RRSP, if allowed
• Begin drawing income from it after retirement through a Life Income Fund (LIF) or RRIF structure
   

There’s no decision to commute, but you’ll still want guidance on how best to invest those funds and create income from them later on.

So, which is right for you?

If you have a DB pension, the question is whether to commute it or leave it in the plan. The option that’s right for you depends on your personal goals, your comfort with investment risk, your other income sources, and how far you are from retirement.

Ask yourself:

• Do I want predictable income for life, or flexibility and control?
• Do I feel comfortable managing my own investments (or working with someone who can)?
• What other income will I have in retirement – like RRSPs, TFSAs, or government benefits?
• Am I in good health, and what’s my family’s longevity like?
• Do I want to leave a financial legacy to my spouse or children?
   

The truth is, commuting your pension can open up opportunities, but it can also create risks. We’ve seen both.

One client, in her early 50s, chose to commute her pension after leaving a long-time role. It gave her the flexibility to semi-retire and start a consulting business. We helped her invest the funds wisely, create a tax-efficient income plan, and stay on track with her goals.

Another client decided to leave the pension in place. He didn’t want the stress of managing investments, and his spouse appreciated the guaranteed survivor benefit. For them, peace of mind was worth more than flexibility.

Don’t make this decision alone

Job changes are more common than ever. Data shows that 21% of millennial workers reported changing jobs within the past year – more than three times the rate of other generations.¹ However, even older workers are making major career shifts later in life. That means more people are facing pension decisions multiple times throughout their careers.

But just because it’s becoming more common doesn’t make it less important.

Each time you leave a job with a pension, the stakes are high. The choice you make can affect your retirement income, your tax situation, and your ability to stay flexible in the years ahead. You don’t want to guess – or rely on advice that doesn’t take your full picture into account.

That’s why we specialize in helping people navigate these transitions. That includes understanding the full impact of pension decisions: not just the numbers, but the emotions, values, and long-term goals that come with them.

We can help you:

• Understand the true value of your pension
• Calculate the after-tax impact of commuting
• Build a retirement income plan tailored to your life
• Decide how to invest the funds if you choose to commute
• Plan for your spouse or heirs
   

Final thoughts

If you’re leaving a job and facing a pension decision, it’s natural to feel overwhelmed. But this can also be a powerful moment of choice – one that shapes your retirement, your freedom, and your financial confidence.

You don’t have to do it alone. Let’s talk.

We’ll walk through your options together, clarify the trade-offs, and help you make an informed decision that fits your life.

Sources

1. Solving the mystery of Millennial and Gen Z job hoppers. October 24, 2023. Business News Daily. https://www.businessnewsdaily.com/7012-millennial-job-hopping.html.