Q: What does “commuted value” mean?
A: Those who have company pension plans that provide a monthly payment in retirement are sometimes able to take the “commuted value” instead. The pension provider makes a calculation and comes up with an amount of money they can pay you in a lump sum instead of paying your monthly pension for life. When the pensioner “commutes” a pension, he or she becomes responsible for creating and maintaining a future standard of living for himself or herself, and his or her spouse.
In recent years, the commuted values of the pensions I’ve looked at have become much more attractive than they were previously. The reason for this is that calculations by the pension providers have resulted in a decision that pensioners need bigger lump sums in order to make up for today’s low interest rates.
Choosing whether to take the commuted value of a pension is one of the biggest financial decisions you can make, so be sure to consult a qualified and experienced professional.