When you leave an employer with a defined benefit pension, you’ll usually be offered a choice: keep a monthly pension for life starting at retirement, or take its commuted value, a lump sum the plan says is worth the same today. The lump sum goes to a locked-in account you invest yourself, and only part of it can move tax-free; the rest is paid to you as taxable income. The decision can’t be reversed. The quick test: divide the yearly pension by the lump sum. A pension that pays 6% or more of the lump sum a year, for life, is hard to match on your own.
The choice in front of you
Your termination statement lists your options and a deadline. Typically:
- Keep a deferred pension. The plan pays you a monthly pension from retirement age, sometimes with indexing, a survivor pension and early retirement options.
- Transfer the commuted value to a LIRA. You invest it. It stays locked in, then becomes a life income fund that pays out with yearly limits.
- Move it to a new employer’s plan, if that plan accepts transfers.
- Buy an annuity from an insurer, which turns it back into a guaranteed income on the insurer’s terms.
Read the commuted value entry in the glossary for how the figure is calculated. In short, it moves with interest rates: higher rates generally mean a smaller lump sum for the same pension.
What the lump sum would have to do
Here’s an illustration. Say you’re 60, leaving your employer, and the plan offers C$450,000 in place of a C$30,000-a-year pension starting at 65.
- The pension’s rate. C$30,000 is about 6.7% of C$450,000, paid every year for as long as you live, and more if it’s indexed.
- What you might draw yourself. The lump sum gets five years to grow before 65. Even if it grew to C$550,000, the 4% guideline for a safe withdrawal rate would give C$22,000 a year, not C$30,000.
- What you’d carry. With the pension, the plan carries the market and longevity risk. With the lump sum, you do, including sequence-of-returns risk if markets fall early in retirement.
These numbers are an example, not a benchmark. Your plan’s figures, its indexing and your health change the answer. But the arithmetic shows why the pension is often the better deal for someone who expects an average or longer life and doesn’t need the capital.
The tax rule most people miss
Tax law caps how much of a commuted value can move to a LIRA or RRSP tax-free. Under section 8517 of the Income Tax Regulations, the cap is roughly the yearly pension you give up times an age factor:
In the example, 11.5 times C$30,000 is C$345,000. The other C$105,000 is paid to you in cash and taxed as pension income in the year you receive it, reported on a T4A.
You can soften that tax. The CRA treats the excess as an RRSP contribution for that year, so you can deduct it on line 20800 up to your RRSP room, carrying forward any unused part. New RRSP room for 2026 can’t exceed the C$33,810 dollar limit, but room you’ve carried forward from earlier years counts too. Without enough room, the excess is a large one-year tax bill, and over-contributions can be taxed at 1% a month.
If you’re 64 or older, a big one-year income can also cost you Old Age Security through the OAS clawback, which starts at C$95,323 of net income in 2026.
What you give up with the lump sum
Ask the plan, in writing, what comes with the pension that the lump sum doesn’t replace:
- Indexing. Full, partial, or none. An indexed pension is worth much more than the same starting amount without it.
- A survivor pension for your spouse.
- Early retirement subsidies or bridge benefits you’d keep by staying in the plan.
- Retiree health or dental benefits tied to taking a pension.
- The plan’s funded status. If the plan is underfunded, ask whether the full commuted value is paid now or part of it later.
Common mistakes
- Deciding on the lump sum because it’s a big number. Compare it to the income it replaces.
- Missing the deadline. Your statement says what happens if you don’t choose. Don’t let that decide for you.
- Ignoring the taxable cash. Plan for the tax on the excess before the money arrives.
- Taking advice from someone paid on the transfer. An advisor paid a percentage of assets, or commission on an annuity, earns more if you take the lump sum. At 1% a year, C$450,000 under management pays C$4,500 a year.
- Forgetting your spouse. A lump sum spent down early leaves less for a survivor than a joint pension would.
- Assuming the commuted value is fixed. It’s recalculated with interest rates, so the figure on an old statement may have moved.
Questions to ask a planner
- What return would the lump sum need to match my pension, including its indexing?
- How much of the commuted value is over the tax-free limit, and what will the tax be?
- Do I have enough RRSP room to shelter the excess, and does leaving the plan restore any room through a pension adjustment reversal?
- What do I lose in survivor, bridge or health benefits if I take the lump sum?
- How would each choice change my CPP and OAS timing and the clawback?
- How are you paid? Will you earn anything if I take the lump sum or buy an annuity?
When a fee-only planner is worth it
Almost always. This is one of the largest and least reversible decisions most employees make, and the person most often advising on it is paid more if you take the money. A fee-only or advice-only planner is paid the same whichever you choose.
Among Canadian fee-only planners who publish prices:
- One-time plan: a median C$1,900 (middle half C$950 to C$3,000, 46 firms). A full pension review usually fits here.
- Hourly: a median C$250 (middle half C$170 to C$298, 15 firms), for a narrower second opinion.
- Ongoing planning: a median C$2,300 a year (21 firms), if you take the lump sum and want help investing and drawing it down.
On a C$450,000 decision, a one-time plan at the median costs less than half of one year’s 1% fee. The Canadian cost guide explains how to read these small samples.
Where to find one
Start with the pension planning specialty or the list of pension planning specialists in the public graph, or browse by province: Ontario, British Columbia, Alberta, Quebec, Manitoba, Saskatchewan, Nova Scotia, Newfoundland and Labrador and Yukon. Pension rules for locked-in money vary by province, so tell the planner which law your plan falls under.
If the pension is part of a larger retirement picture, read retiring in Canada with C$1 million and when to take CPP.