as Ontario Power Generation (OPG) As an employee approaching retirement, one of the most important decisions you will face is whether to take this job commutated value your pension or stick with the guaranteed lifetime pension offered by the company. While both options have their advantages, there is an important factor that often surprises retirees: tax hit due to the Maximum Transfer Value (MTV).
If you’re considering commuting your pension, in this article we’ll explain how it works, why understanding MTV is so important and whether it’s the best option for you.
What is the added value of your pension?
Commutated value represents the present value of all future retirement benefits, but in a lump sum. This is essentially what your annuity would be worth if you took all the money up front rather than receiving monthly payments. Once the converted value is accepted, the funds are sent to a Blocked Retirement Account (LIRA)but here’s where things get tricky – because of Maximum transfer value (MTV).
How the maximum transfer value (MTV) affects your payout
If you choose to commute to work, not all of the money can be transferred to a LIRA tax-free. The Maximum transfer value (MTV) sets a limit on how much of the added value can be transferred to the LIRA without immediate taxation.
Let’s break it down:
- The largest portion of the converted value is transferred tax-free to the LIRA.
This portion is sheltered, which means you won’t pay taxes on it until you start withdrawing the funds in retirement. - Part of the added value will go to you in cash, which is taxable.
It’s here tax hit is coming. The amount in excess of the MTV is paid in cash and added to your taxable income for the year. For most OPG employees, this portion is often taxable one third or more total converted value. This can lead to significant tax expenses if not planned for.
Why timing matters: Avoiding a massive tax bill
Careful timing of the surcharge payment can have a major impact on the amount of tax you ultimately pay. Here’s why:
- If you take the income value in the same year that you are still earning money, your income will be higher, which means that more taxes from cash withdrawal with commutated value.
- The smarter move is accept the converted value in the following yearwhen you no longer receive a salary and your income is lower. This reduces your overall tax burden.
Many successful retirees choose to defer their accrual until the next calendar year to minimize the impact of a large taxable cash withdrawal.
Should you take commutated value?
Taking commuter value isn’t for everyone, but it may be the right move depending on your situation. Let’s look at some scenarios where taking a commutated value might make sense.
Health concerns
If you have serious health problems or a shorter life expectancy, taking a commuter value can provide greater financial security. A pension is designed to last for life, so if you die earlier than expected, you may not receive your full lifetime benefits. Meanwhile, the converted value gives you control over the full amount and you can pass it on to your beneficiaries.
For example, if you suffer from a health problem such as cancer, as one OPG employee did, accepting the added amount guarantees you and your family immediate access to the funds, regardless of how long you live.
Financial flexibility
Commutated value gives you more control over your money. You can use it to invest, pay off debts or use it for larger purchases. But here’s the catch: you have to be there disciplined about how you deal with it.
Some people fall into the trap of overspending or making large, impulsive purchases – such as buying a new car or truck – soon after receiving a lump sum payment. If you’re someone who might be tempted to do the same, it may be a safer option to stick with a lifetime pension.
Leaving a legacy
One of the biggest benefits of taking commuter value is that the money is there yourand you can pass it on to your spouse, children or other beneficiaries. With a traditional pension, if you die, your spouse may only receive a portion of the payment – usually around 60-70%. Once you both die, payments will stop completely and there will be nothing left to give to your family.
Thanks to the converted value, you can designate beneficiaries, knowing that your money will go to your loved ones when you are no longer around.
Should you stick with a lifetime pension?
For many OPG employees guaranteed income with a lifetime pension provides peace of mind. Here’s why it’s worth staying in retirement:
- Guaranteed income for life
You don’t have to worry about managing your investments or outliving your money. Your pension will be paid to you throughout your life. - Less financial risk
With a pension, there’s no risk of losing money in the stock market or running out of money if your investments don’t perform well. - Spouse protection
Your spouse is usually entitled to a percentage of your pension upon your death, which provides financial security for them.
Is a follower annuity an option?
Another option to consider is imitative rentwhich mimics a lifetime pension but is privately managed. This allows you to transfer your retirement funds into a private annuity while still receiving regular payments but with more flexibility. This is less common, but is worth exploring with your financial advisor if you want to get the best of both worlds.
Frequently asked questions about added value for OPG employees
What is the maximum transfer value (MTV)?
Maximum Transfer Value (MTV) is a limit on how much of the converted value can be transferred to a LIRA tax-free. Anything above MTV is paid in cash and is taxable.
How much tax will I pay on the commuting value?
The taxable portion of the converted value depends on how much it exceeds the MTV and your tax bracket. In many cases, one-third or more of the total amount is taxed as income in the year you receive it.
Can I avoid the commutated value tax hit?
While you can’t avoid taxes completely, you can reduce your tax impact by postponing your payout to a year when your income is lower, such as the year after you stop working.
Should I accept commuter allowance if I have health problems?
If you have serious health problems, accepting a subsidized amount can ensure you have access to your retirement funds when you need them. It also allows you to pass on the remainder to your beneficiaries.
Can I invest the converted value?
Yes. Converted value can be invested in a variety of ways to generate profits. However, it is important to manage these investments carefully to ensure that the money will last throughout retirement.
