KNOWLEDGE EXPECTED OF: CFP® Professionals Only
- Define a pension commutation.
- Identify reasons why a pension plan member may commute a pension.
- Involuntary or voluntary termination of employment
- Early retirement
- Termination of pension plan
- Termination of pension plan membership
- Identify that the commuted value of a pension benefit entitlement is actuarially equivalent to the income stream payable to the average member of a pension plan.
- Identify factors that are taken into consideration in the actuarial commutation of a defined benefit pension entitlement, such as:
- Interest rate expectations
- Inflation expectations
- Investment return expectations
- Life expectancy based on mortality tables
- Assumed retirement age
- Assumed marital status
- Assumed age difference between spouses
- Allowance for taxation
- Allowance for pension indexation
- Discount rate
- Explain that an individual’s personal circumstances may differ from the average pension plan member considered in the actuarial commutation of a defined benefit pension.
- Identify factors that may cause the commuted actuarial commutation assumptions to differ from the individual’s personal circumstances, such as:
- Actual life expectancies
- Actual retirement age
- Amount of income needs
- Timing of income needs
- Marital status
- Actual difference in ages between spouses/partners
- Other income sources
- Difference in growth rate of assets
- Tax implications
- Estate plan
- Identify the amounts of a commuted value of a defined benefit pension.
- Maximum Transferable Value, as allowed under the Income Tax Act
- Taxable portion
- Explain the options that may be available for the Maximum Transferable Value of a defined benefit pension commuted value.
- Explain the options that may be available for the taxable portion of a defined benefit pension commuted value.
- Estimate the tax impact resulting from the receipt of the taxable portion of a defined benefit commuted value.
- Explain how each of the factors may impact the suitability of commuting a defined benefit pension plan, such as:
- Present value of the after-tax income streams from each option
- Solvency of the pension plan
- Solvency of the former employer
- Statutory protection of pension income
- Potential for post-retirement pension benefits
- Control over timing the receipt of income
- Control over investment decisions
- Impact on assets/pension upon death
- Need for consistent and/or lump sum income
- Other sources of income
- Health of individual
- Risk tolerance
- Investment experience
- Estate plan
- Personal attitudes/preferences
- Evaluate how each of the factors may impact the suitability of commuting a defined benefit pension plan.
Glossary of Verbs (mouse over to see definition)
To state exactly the meaning of
To be aware of / to recognize and correctly name / to locate an appropriate resource
To make clear the meaning of / to describe something in more detail or reveal relevant facts or ideas related to it
To note the similarities and differences between two or more things
To determine an approximate value for
To find the value using mathematics
To change from one form or purpose to another
To reach a conclusion or make a judgement through careful study
To give the meaning of / to construe or understand / to translate orally