There are four things to keep in mind when considering a commuted value transfer:
- You assume responsibility for investing the funds.
- Income-tax regulations can affect commuted value transfers.
- There may be an impact on your RRSP room.
- You may be able to repay a commuted value transfer.
By taking this lump sum when you leave teaching, you also assume the responsibility and costs for investing it—with its eventual value affected by the ups and downs of the economy, inflation and the investment decisions you make. In contrast, a formula determines your pension; it does not depend on investment returns and it is fully protected from inflation.
If you transfer the commuted value, you could incur additional costs that reduce the amount available for investments. For instance, a large commuted value transfer may not be entirely tax-sheltered.
If you transfer funds over this limit (which depends on your age and pension amount), the excess is considered income and is taxable in the year we transfer the funds.
Funds transferred to another defined benefit pension plan may not be subject to this limit.
If you transfer the commuted value, a pension adjustment reversal (PAR) will be calculated. A PAR is the difference between the value of the post-1989 portion of your termination payments and the pension adjustments (PAs) reported for the same period. Consequently, you may be able to restore lost RRSP room.
NOTE: If the commuted value exceeds the tax-sheltered limit, the PAR will be zero.
If you transfer the commuted value and later return to teaching, it is possible to repay the transfer and reinstate your credit. However, the repayment amount is the actuarial cost to restore your credit or the amount paid plus interest, whichever is greater.
Bill is 49 years of age and has accumulated 26 years of credit. With an average salary of $75,000, his commuted value this year is $520,000. It could cost him $900,000 to reinstate the credit six months later.