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HomeJob RetirementShould you include your pension in your net worth?

Should you include your pension in your net worth?

A pension is also payable in the future, but it is not contingent on anything—at least not the pension you have earned to date. It is a promised, pre-determined monthly payment received as of a certain age, payable for life, and possibly beyond (to a surviving spouse as a survivor benefit, for example).

How to calculate your net worth in Canada

A net worth statement is a simple concept but an important part of personal finance. It is calculated by taking your assets and subtracting your liabilities. As your assets rise, or as your liabilities are paid off, your net worth—the difference between the two—increases. This is a goal of financial planning.

What is the commuted value of a pension?

When you get your annual pension statement, Ed, there may be different values listed, or possibly none at all. Beyond the projected future income, there may also be a commuted value. A commuted value is a present value for the pension, calculated based on the future monthly payment, the number of months until that payment begins, and interest rates.

A commuted value may be payable to a pension plan member if they leave the pension plan. If a plan member gets a new job or retires before a certain age (subject to the plan rules), they may be able to forgo their pension and instead take a lump sum commuted value payment. Some pensions will be eligible to go into a locked-in retirement account (LIRA), and some will generally be taxable.

Some pension statements will list a value for the pension based on other criteria. For example, it is common to see a value on a pension statement for contributions with interest. The future income stream is similar to a registered retirement savings plan (RRSP) contribution that has “earned interest” or grown in value since the contributions were made.

A long-time defined benefit (DB) pension plan member may have a pension so valuable that another saver with only an RRSP would need more than $1 million to generate a similar retirement income.

Should you include CPP and OAS?

The Canada Pension Plan (CPP) and Old Age Security (OAS) are government DB pensions that are not much different from a workplace DB pension. I have never seen CPP or OAS listed as assets on a net worth statement.

So, on this basis, Ed, could your DB pension be included on your net worth statement? Sure, it could. Putting a value on your pension could be difficult, though. Most pensions do not list a commuted value on their annual statements. And if a pension statement lists your contributions with interest, that may understate the pension value—particularly if your employer’s contributions with interest are not also considered.


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