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Pension or Lump Sum? The Commuted Value Decision in Canada

Updated

When you leave an employer with a defined benefit pension before retiring, you may be offered a choice: keep the pension, paid for life from the plan, or take its commuted value, a lump sum that replaces it. This page explains how the commuted value is set, how it is paid out and taxed, and what each option trades away. It is part of the workplace pensions hub.

When you get the choice

Whether you can take a lump sum depends on the plan and the pension law it is under. For a federally regulated plan: A member of a federally regulated plan who leaves before they can start an early pension (10 years before pensionable age) can transfer the value of their pension to another pension plan that accepts it, to a locked-in retirement savings plan, or use it to buy a life annuity, by notifying the administrator within 90 days of leaving (a survivor has the same right if the member dies before then); once they can start a pension, this transfer right no longer applies (the plan's own terms may still allow one). Plans under provincial law follow that province’s pension act. A federally regulated plan must give you a written statement of your pension and other benefits within 30 days of leaving; ask for the options and the deadline to choose.

How the commuted value is set

The commuted value is the present value of the pension you’ve earned: the lump sum that, invested at the assumed interest rate, would be expected to pay the same benefit over your expected lifetime. The plan’s actuary calculates it.

FactorEffect on the commuted value
Size of the pension earnedA larger pension means a larger lump sum
Interest rates at the calculation dateLower rates raise it; higher rates lower it
IndexingA pension that rises with inflation is worth more
Early retirement subsidies and bridge benefitsCan add value if you qualify for them when the value is calculated
AgeChanges how many years of payments are expected and how far away they are

Because the calculation uses current interest rates, two people with identical pensions leaving a year apart can receive quite different amounts.

How it is paid out and taxed

A lump sum from a defined benefit pension can move tax-deferred only by direct transfer, and when it goes to an RRSP, RRIF, PRPP, SPP or a money purchase plan, only up to a limit set by the Income Tax Act; any part above the limit is taxable income in the year (an excess sent to an RRSP or RRIF counts as an RRSP contribution, deductible only within your RRSP deduction limit).

In practice, the part within the limit goes to a locked-in account (a LIRA or locked-in RRSP), and the part above it is paid to you in cash with tax withheld; if you have unused RRSP room, contributing that cash to an RRSP defers the tax. Locked-in money can’t be withdrawn like an ordinary RRSP: A LIF has a yearly minimum (the same factor as a RRIF) and a yearly maximum set by the plan's jurisdiction from its own table, except that Quebec sets no maximum from 55; in the first year the maximum is prorated by the months left. Should I transfer my pension to a LIRA and LIRA withdrawal rules cover the account.

A break-even example

A commuted value of $500,000, or a pension of $30,000 a year starting now (not indexed, and ignoring tax).

  • With no investment return, the lump sum would match the pension for 16.7 years.
  • Invested at an assumed 4% a year and drawn at $30,000 a year, it would last about 28.0 years.

The pension keeps paying however long you live; the lump sum runs out at that point, but any balance left when you die goes to your beneficiaries.

For scale, life expectancy at 65 in Canada is 19.75 more years for men and 22.45 for women (2024 life table); those are averages, so some people live much longer.

Keeping the pension vs taking the lump sum

Keeping the pensionTaking the commuted value
Income guaranteed for life, however long you liveYou control the investments and the timing of withdrawals
No investment decisions or market risk for youReturns, and the risk of losses, are yours
Indexed to inflation if the plan provides itInflation protection depends on how you invest
A survivor pension for your spouse (in a federally regulated plan, required if you have a spouse unless they waive it in writing)Any money left at death goes to your beneficiaries or estate

Circumstances to weigh: your health and family longevity, whether you have other guaranteed income (CPP, OAS, another pension), whether the pension is indexed, your comfort managing a large sum, and how much you want to leave to heirs. For ways to draw a lump sum down, see annuity vs RRIF.

Before deciding

  • Ask the plan for the commuted value, how much of it can be transferred tax-deferred and how much would be paid in cash, and the pension you’d give up.
  • Ask whether the commuted value is paid in full or reduced because the plan is underfunded.
  • Check your RRSP room for the cash portion, on your notice of assessment.
  • Note the deadline: pension law sets a window to choose (90 days after leaving for a federally regulated plan); ask what happens if you miss it.
  • Ask whether the plan allows taking part as a pension and part as a lump sum; it depends on the plan.

Sources

The figures and rules on this page come from these sources, last checked against them between September 29, 2026 and September 30, 2026. How we check facts.