How to model commuting a pension

You may wish to model a scenario where your client takes a commuted value for their defined benefit pension plan.

There will be 2 parts to illustrating this scenario for both the tax-deferred and immediately taxable commuted value amounts.

1. Tax-deferred amount: Update the locked-in account value on the Assets page to include this amount.
2. Immediately taxable amount:  Enter a lump sum taxable income in the first year of the projections.  Ensure the after-tax portion is contributed to the applicable assets (ie. non-registered, TFSA, registered, etc.). 

Let's use an example to demonstrate.  In this case, if the client chooses to take his commuted value immediately, $165,000 would be entitled to tax deferral and would go into a LIRA. The remaining commuted value of $250,000 would be taxable in that year.  If the client has unused RRSP contribution room, it is possible to contribute some to an RRSP, and the rest to a TFSA and/or non-registered account.

Part 1: The tax-deferred portion of the commuted value

On the Assets page, add the tax-deferred portion of the commuted value to one of the existing LIRA accounts, or create a new LIRA account.  

Part 2:  The taxable portion of the commuted value

Create a new income column in the projections for the portion of the commuted value that is taxable. Go to the Income page under Scenario Setup -> Income and select Add Income.

Enter a Description (e.g., Commuted Pension), the Amount, a Type of Other, and change the Taxable column to Yes. It is not RRSP eligible and the From Age and To Age would be the age of the client in the first year of the projections.

Back on the Planning page, you'll see the $250,000 amount under the new column for the commuted pension taxable amount. 

Based on the Base Expenses amount, any surplus cash remaining after taxes will be contributed to the assets according to default logic.  In this example, there is an RRSP contribution room in the amount of $16,200 and this amount is automatically contributed. A maximum TFSA contribution is made for that year, which includes unused contributions from past years, and the remainder goes to the non-registered account.  You don't have to manually contribute to the assets as long as automatic cash-flow management is turned on.

Tips

• To help your client decide whether or not to commute their pension you may wish to create 2 scenarios. In the first scenario, model the defined benefit pension plan (DBPP). In the second scenario, exclude the DBPP and include the commuted value as shown above. One value to compare between scenarios is the projected Estate After Tax at different ages. This is visible in the report under the Net Worth Projections table.  
• You may also show partial unlocking of the LIRA upon conversion to a LIF account.