When leaving an employer with a defined benefit (DB) pension—due to retirement, a layoff, or a job change—you may have to make a major financial decision: should you take the commuted value of your pension as a one-time lump sum or choose a monthly pension paid for life?

Both options have distinct advantages, risks, and long-term consequences for your retirement. The optimal choice is highly personal, depending on factors like your financial situation, risk tolerance, health, overall tax situation, and comfort level with managing investments. This article provides a detailed comparison to guide you toward a well-informed decision.

The commuted value is the present value of the pension you’ve earned to date. In simple terms, it is the amount of money needed today to fund your future pension payments for life, based on actuarial assumptions such as interest rates, mortality, and inflation.

If you choose the commuted value:

• A portion of the proceeds are typically transferred tax-deferred into a locked-in retirement account (LIRA). The amount that can be transferred tax-deferred is referred to as the maximum transfer value and determined by a formula provided in the Income Tax Act.
  
  
• Any amount above the maximum transfer value is paid to you as taxable income, which can then be invested in various after-tax investment vehicles.
  
  
• You gain full control of the investment of your pension proceeds and flexibility for the management of your retirement income.

Lifetime pension income is a series of regular payments from your former employer’s pension plan, offering a predictable source of income. Benefits include:

• Predictable, monthly income for life
  
  
• Optional survivor benefits (full or partial income payments continue for your spouse after your death)
  
  
• Potential for inflation protection, depending on the plan
  
  
• No investment decisions required
  
  
• May offer bridge benefits if retiring prior to the normal retirement date

The pension plan retains responsibility for managing assets, bearing investment risk, and ensuring payments are made according to plan provisions.

1. Control and flexibility

A commuted value gives you full control over how your retirement savings are invested. This includes the ability to:

• Customize your investment portfolio to match your personal risk tolerance.
  
  
• Access funds as needed, subject to applicable withdrawal limits.
  
  
• Leave unused proceeds for beneficiaries or your estate.

This flexibility is especially valuable if you want to tailor your retirement strategy or anticipate large expenses.

2. Estate benefits

With the commuted value, your remaining funds pass to your beneficiaries, whereas lifetime pensions usually offer limited or no residual value after both spouses pass away. For people who prioritize generational wealth, this is a key advantage.

3. Potential for higher long-term returns

A commuted value lump sum, if invested, can potentially generate a higher income than the defined-benefit pension plan. This option is often attractive to individuals who are inclined to manage their own investments, or those who utilize professional financial guidance, as the potential for higher returns relies on market performance exceeding the actuarial assumptions used to calculate the lump sum.

4. Tax planning opportunities

Holding your money in a LIRA allows you to:

• Strategically time withdrawals.
  
  
• Potentially lower lifetime taxes through planned withdrawals or early-retirement drawdowns.

This level of tax planning is not possible with a fixed pension payment.

5. Beneficial if you expect a shorter life expectancy

If you anticipate a shorter-than-average life expectancy, electing the commuted value could be the better choice for preserving financial value for your family or establishing a legacy. 

1. Investment risk

With the commuted value, you face the full risk of market volatility, poor investment decisions, or low returns.

2. Longevity risk

If you outlive your savings, there is no guaranteed income for life. This is one of the biggest downsides compared to the pension income option.

3. Taxable excess amounts

If the commuted value exceeds the maximum transfer amount, the excess is paid as taxable income in the year you receive it, which may increase your taxes substantially.  You may be able to decrease the taxes payable if you have available RRSP contribution room and contribute some or all of the taxable portion to your RRSP or a spousal RRSP for your spouse or common-law partner. 

4. Emotional or behavioural risks

Receiving a large lump sum of money introduces potential emotional and behavioural challenges that can impact retirement security. These pitfalls include:

• Holding overly conservative portfolios - Fear of losing capital can lead to excessively cautious investment strategies.
  
  
• Overspending - Having immediate access to a significant amount can tempt individuals to spend too freely.
  
  
• Attempting to time the market - Trying to predict market movements often results in poor investment decisions.
  
  
• Failing to rebalance or optimize retirement income - Neglecting ongoing portfolio management can undermine long-term financial health.

Effectively managing these behaviours is crucial for securing your financial future in retirement.

1. Guaranteed income for life

A lifetime pension provides stable, predictable income, regardless of market conditions or longevity. This security is deeply valuable for retirees who prioritize peace of mind.

2. No investment management required

For individuals who are uncomfortable managing investments or who do not work with professional advisors, a pension offers a hands-off solution: the plan manages everything and the employer is responsible for ensuring the plan has the funds to pay your monthly pension payments.

3. Protection against longevity risk

The pension keeps paying out as long as you live—even if you live far longer than expected. Those with good health or long-lived family members benefit most.

4. Often includes survivor benefits or inflation indexing

Some pensions include:

• Payments guaranteed for a specific minimum number of years.
  
  
• Payments continue to surviving spouse or common-law partner throughout their lifetime, although may be reduced.
  
  
• Cost-of-living adjustments (COLA) designed to help the pension keep pace with inflation.

5. Potentially more favourable in high-interest-rate environments

When interest rates are high, it takes a smaller investment today to provide for the same level of lifetime income. As a result, commuted values will be lower when interest rates are high, making the lump sum less attractive. In those periods, the pension income may be the better value.

6. Earlier eligibility for the pension income tax credit and income splitting 

The pension income tax credit provides a non-refundable reduction in taxes payable on the first $2,000 of eligible pension income. Income direct from a pension plan qualifies for this at any age. The registered income that would be provided from the commuted value would not be eligible until age 65.

Income splitting refers to transferring income from the higher-income-earning spouse or common-law partner to the lower-income-earning spouse or common-law partner, resulting in lower overall taxes. Up to 50% of income direct from a pension plan can be split with your spouse or common-law partner at any age. The registered income that would be generated from the commuted value would not be eligible for income splitting until age 65. 

1. Lack of estate value

The payments cease upon the death of both you and, if applicable, your spouse. You generally cannot leave the residual value to your family or causes you care about.

2. Limited control

You cannot adjust the income stream, accelerate withdrawals, or respond to changes in life circumstances. You are locked into the plan’s payment formula.

3. Possible plan solvency concerns

Although most pension plans are secure, those that are underfunded can present risks. Certain jurisdictions offer protection, but it's not absolute.

4. Inflation risk

If your pension has no inflation indexing, or only partial indexing, its purchasing power declines over time. This can dramatically reduce real income over a 25- to 30-year retirement horizon.

Your risk tolerance

Do you feel comfortable making investment decisions independently or working with an advisor that can assist you with your retirement income and investment decisions? Are you comfortable with accepting a higher level of risk in exchange for potential higher long-term returns? If not, the guaranteed pension may provide better long-term stability. 

Health and longevity expectations

• Strong family longevity → pension may provide more lifetime value
  
  
• Health concerns or shorter expected lifespan → commuted value may preserve more value

Spousal or estate planning needs

If leaving value for your estate is important, the commuted value offers greater flexibility. If providing your spouse with the security of guaranteed lifetime income is important, the pension income may be preferable.  

Market conditions and interest rates

Interest-rate environments can make one option significantly more attractive.

Personal circumstances and retirement strategy

Your taxable income levels over time, the timing of government benefits such as the Canada Pension Plan and Old Age Security, your other retirement income sources and your personal goals and objectives all influence the optimal choice. 

In summary, the commuted value option offers flexibility, control, and estate benefits, but requires discipline and exposes you to investment and longevity risks. The lifetime pension option provides guaranteed stability but limits control and offers little, if any, estate value after the death of you and your spouse or common-law partner.

Choosing between the commuted value and lifetime pension income is a significant, personal decision—not merely a mathematical one. Your choice should align with your unique goals, health status, family situation, investment knowledge and risk tolerance. Ultimately, the best option is the one that provides you with peace of mind and confidence in your financial future.

For personalized advice and a comprehensive financial plan that can model and compare both scenarios, consider meeting with an ATB Wealth advisor who can provide advice and recommendations tailored to your unique situation.