Commuted Value Withdrawal Is Risky
The commuted value of a pension is the estimated amount of money needed to pay your pension in retirement. Moving your funds out of HOOPP just before you reach age 55 can be risky.
Consider what an independent financial advisor has to say about other financial advisors that may suggest that you withdraw your funds. Read the Advisor’s Edge magazine article, Doing Your Homework.
Here are some key features of HOOPP that should also be considered:
Guaranteed amount of monthly income
HOOPP is a defined benefit plan where the amount of pension is determined by a formula that recognizes your pre-retirement earnings, your contributory service, and your age.
Promised pension never runs out
HOOPP guarantees to pay you a specified monthly pension for life. It’s the same story for spouses of retired members. By law, the spouse is automatically the primary beneficiary for HOOPP benefits, unless a waiver has been signed. After the member dies, the surviving qualifying spouse continues to receive a percentage (a member can choose between 60, 80, or 100 per cent) of the member’s basic lifetime pension (excluding bridge and transition benefits) for the rest of his or her life. Neither the member nor qualifying spouse can outlive the pension, no matter how long they live. Members without a qualifying spouse at retirement are also guaranteed a pension for life-and should they die before receiving payments for 15 years (180 payments), the primary beneficiary they name will receive the remaining payments, excluding any bridge and transition benefits.
HOOPP assumes investment risk
Your HOOPP pension does not fluctuate with the ups and downs of the financial markets. If you take your money out of HOOPP, you assume all of the investment risks as well as rewards. In that case, your future retirement income will depend on how well your investments perform and interest rates in effect at the time you convert your investments into income. You could win or you could lose.
Inflation protection
The portion of a HOOPP pension based on contributory service built before 2006 receives a guaranteed annual cost of living adjustment equal to 75 per cent of the previous year’s increase in the consumer price index (CPI), to a maximum CPI increase of 10 per cent. The Board of Trustees can increase the adjustment to 100 per cent of the previous year’s CPI increase - again to a maximum CPI increase of 10 per cent – if funds permit, although this additional ad hoc adjustment isn’t guaranteed. For the portion of the benefit based on service acquired after 2005, the amount of COLA will not be guaranteed. HOOPP’s Board will vote annually on whether to provide any inflation protection on post-2005 service, and if there is an increase, how much it will be. Annual COLA increases will range from zero to 100 per cent of the previous year’s increase in the CPI, again to a maximum CPI increase of 10 per cent.
Tax hit
In some cases, not all of the commuted value of your pension may be transferred “tax free” to a locked-in retirement vehicle. Advisors suggest that you can take any excess “cash” and pay down debt or improve your lifestyle. However, at withdrawal that money will be subject to up to 30 per cent withholding tax. The amount you receive must be declared as income in the year you receive it and will be taxed at your personal tax rate. Please be aware that, depending on your personal tax rate, further tax may be assessed on this amount. As a result, the amount of money you have for retirement purposes can be significantly reduced. In HOOPP, you won’t pay taxes until you start receiving your pension benefits.
