What actually changes
Keeping the pension means a known monthly income for life, paid by the plan. Taking the commuted value means a balance you invest and draw down yourself, with more control and more flexibility for your estate, but no guarantee it lasts as long as you do.
What the rules say
- Your options on leaving: typically a deferred pension from the plan starting at normal or early retirement age, or a transfer of the commuted value out of the plan.
- Where the money goes: usually into a locked-in account such as a Locked-In Retirement Account (LIRA) or Life Income Fund (LIF). Locked-in money is meant for retirement income, and access to it is limited. Unlocking rules depend on your province or on federal rules.
- The tax limit: only the prescribed amount can move tax-free. If the commuted value is higher, the excess must be paid in cash and is taxable income in the year you receive it.
- What sets the size: interest rates matter a lot. Higher interest rates mean a lower commuted value, because a smaller amount today is needed to fund the same future pension, which is why two offers a year apart can differ.
What people in this situation weigh
- Health and family longevity: a pension pays for life, however long that is; a lump sum can run out, but anything left goes to your estate.
- Other guaranteed income: the Canada Pension Plan (CPP), Old Age Security (OAS) and any other pensions already cover part of your needs.
- The plan's health: a defined benefit (DB) pension depends on the plan being funded. In Ontario, the Pension Benefits Guarantee Fund covers part of monthly pensions from eligible plans if an employer becomes insolvent.
- The tax bill on the cash portion: a large taxable amount in one year can raise your tax rate and, from 65, affect OAS.
- Survivor protection: compare the pension's survivor share with what a lump sum could leave.
A worked example
Wei, 58, is offered a commuted value of $600,000 or a pension of $3,200 a month from 65. The plan tells him $480,000 can transfer to a LIRA and $120,000 is paid as cash. That $120,000 is added to his income for the year he receives it, on top of his salary. Keeping the pension, he gets $3,200 a month for life from 65. Taking the transfer, his LIRA would have to be invested and drawn to provide similar income, with the risk of it running short if returns are poor or he lives a long time.
Illustrative figures. The real split between the transfer and the cash is set by the plan using the tax rules.
How TruePath fits in
TruePath does not compare a pension and a commuted value side by side. You can model either one: the pension with its amount, indexing, bridge and survivor share, or the lump sum as a locked-in account that funds withdrawals. Building the plan once each way shows how each affects your income and estate.
Related questions people ask
What is a commuted value?
The lump-sum value today of the pension you would otherwise receive for life, based on interest rates and your age at the time.
Is a commuted value taxable?
The portion within the tax limit can move to a locked-in account tax-free. Any amount above it is paid in cash and taxed as income in the year you receive it.
Can I take a commuted value as cash?
Generally only the portion above the tax limit comes out as cash. The rest is locked in and meant for retirement income, subject to the unlocking rules that apply to your plan.
Why did my commuted value change so much?
Interest rates are a major factor. When rates rise, the lump sum needed to fund the same pension falls, and when rates fall, it rises.
Sources
- Canada.ca: Transfers from a defined benefit provision, section 8517 (Registered Plans Directorate)
- Canada.ca: Employer pension plans (Financial Consumer Agency of Canada)
- Canada.ca: Transfer value, public service pension plan
- Financial Services Regulatory Authority of Ontario: Pension Benefits Guarantee Fund
This page is general education about Canadian retirement rules, not personalised financial advice. Figures are for the 2026 tax year and change with government updates.