View
220
Download
3
Category
Tags:
Preview:
Citation preview
1
CIFPs Annual Conference – June 2007
Pensions UpdatePatrick Longhurst, CFP, FCIA
2
My 2006 presentation –Three central issues
1. Does the client fully understand the implications of the choices available?
2. What is special about him/her that will influence the decision?
3. Have you looked at the overall context in which the decision should be made?
3
1. Understanding the implications
Many people find pensions confusing! Make sure they understand the options available, plus
A decision made about a “pure” pensions issue can impact on:
Tax-sheltered contribution
room
Benefits payable upon death, disability or
termination of employment
Other post-retirement benefits
4
2. What is special about the client?
Pension options are costed by actuaries, based on average statistics from large populations
On the other hand, your client is anything but average!
How do your client’s expectations vary from the actuarial assumptions used for :
Mortality? Investment returns? Earnings increases? Spousal details?
3. Pension Decisions in Context
5
When to retire
What form of pension
Whether to buy back service
Lump-sum or annuity
When to take CPP/QPP
Income sharing strategy
OtherPensions
RegisteredInvestment
s
Non-RegisteredInvestment
s
Post-Retirement
Benefits
SpousalAssets
Other Income Sources
Vision of Retirement
Attitude to risk
Global Economics
Inco
me
Tax
Rule
s
Demog
raphic
sPension Legislation
6
Key feedback
All logic may point to one approach - but if the client or their spouse does not feel comfortable – forget it!
Never be afraid to ask, “Is there anything else you want to tell me?”
If the pension plan is Defined Benefit, ask about the funded / solvency status
Not everyone likes RRSPs!
7
Recent / impending developments
The Tax Fairness Plan – Pension splitting The 2007 Federal Budget:
– RRSP maturity dates– Phased Retirement
Locked-in vehicles – LIRAs, LIFs and LRIFs:– Provincial variations– The trend to unlocking
8
The Tax Fairness Plan
Pension income splitting for tax purposes in retirement; major types of qualifying income:
For individuals aged under 65, income from a Registered Pension Plan (RPP)
For individuals aged 65 and over: Income from an RPP Income from an RRSP annuity Payments under a RRIF
Proposed to be effective in 2007
9
Pension income splitting –What can we expect?
This is not the CPP approach – no cash will change hands!
Both spouses must agree to the allocation The pension income will retain its character
when transferred Up to 50% of eligible income can be split The changes will be effective in 2007
10
Pension income splitting –Other implications
This does not apply to Supplemental Executive Retirement Programs (SERPs)
This can affect the amount and the transferring of non-refundable tax credits
This could impact on the future of Spousal RRSPs
The Provinces may introduce parallel provisions
11
Pension income splitting - Example
A couple, both born on January 1, 1955 The RPP member retires at age 55 with a pension of
$60,000 per year – indexed to 100% of the CPI The member will apply for a full (70%) CPP at age 60 Both spouses will receive full OAS at age 65 The spouse has no other income The member will transfer 50% of the pension for tax
purposes Other sources of income have been ignored Provincial and Federal savings included
12
Pension income splitting - Example
YearTotal Tax Paid
No Sharing$
50/50 Sharing$
Difference$
2010 14,200 10,400 3,800
2015 16,200 11,800 4,400
2020 22,500 16,600 5,900
2025 26,100 19,200 6,900
2030 30,100 22,300 7,800
2035 34,900 25,900 9,000
13
Pension splitting – Issues for your client
Makes taking a pension more attractive May impact on RRSP contribution strategy Must be acceptable to the spouse Projections look very attractive For further illustrations see the Department of
Finance website www.fin.gc.ca/pensioncalc/index_e.html
14
Federal Budget 2007 – RRSPs and RPPs
Extension of maximum age for converting an RRSP or an RPP to the end of the year in which the contributor is age 71
Transition rules for those affected Implications for estate planning and the OAS
clawback Not necessarily to the client’s advantage Proposed to be effective in 2007
15
RRSPs and RPPs –Issues for your client
You will probably need some modeling. Issues include:
– Does he/she have qualifying earned income or unused contribution room?
– Does he/she have a younger spouse?– What is the balance between his/her registered and non-
registered savings?– Is the claw-back an issue?
Generally, this makes LIRAs more attractive by increasing their flexibility
16
Federal Budget 2007 –Facilitation of phased retirement
Applies to eligible members of DB Pension Plans who are aged over 55 and entitled to an unreduced pension
Can draw a limited pension benefit while continuing to work and accrue new pension benefits
Currently the only solutions available in most Provinces are to:
Take the pension and move to another job Come back to work on a contract basis Postpone the pension until final retirement
Proposed to be effective in 2008
17
Phased retirement - illustration
An individual aged 55, earning $100,000 per year, entitled to an unreduced pension of $60,000 per year
Agrees to stay on until age 60, working half-time for $50,000 per year, increasing at 3% per year
Decides to take an immediate pension of $30,000 per year – Part A
Defers the other $30,000 which will continue to grow as an active member – Part B
Assume future rate of return of 6% and life expectancy to age 85
18
Phased retirement - Illustration
YearPension Payable
Part A $ Part B $
2007 30,000 -
2008 30,000 -
2009 30,000 -
2010 30,000 -
2011 30,000 -
2012 onwards 30,000 40,575
Present value of future pension in 2012
390,000 527,000
19
Phased retirement – Issues for your client
Any member of a DB Plan, entitled to an unreduced pension usually loses value if they defer their pension commencement
The phased retirement proposals help to reduce this loss
There may be other issues which make this an excellent decision
The client should be aware of the dynamics of the pension plan
Alternative rules already exist in certain Provinces
20
Locked-in pension money -Historic position
Locked-in Retirement Accounts (LIRAs) were the successors of Locked-in RRSPs, designed to accept pension settlements and be administered under Provincial rules
Originally LIRAs had to be converted to annuities by the end of the year in which the member reached age 69
Life Income Funds were introduced to allow more flexibility:
Minimum withdrawals like a RRIF Maximum withdrawals based on a formula Must be converted to an annuity by age 80
21
Locked-in pension money – Historic position (Continued)
In some Provinces Locked-in Retirement Income Funds (LRIFs) were also introduced:– Same minimum withdrawals as a LIF– Different formula for maximum withdrawals– No requirement to annuitize at age 80
Unlocking was only permitted where the amount was trivial or in cases of shortened life expectancy
22
Locked-in pension money –Recent developments in Alberta
Alberta also has Defined Contribution Retirement Income Accounts (DC RIAs) that may be offered by a DC Pension Plan
Changes effective August 10, 2006– A one-time 50% unlocking option– A new LIF with no life annuity requirement and
increased maximum withdrawal factors– LRIFs are to be discontinued
23
Locked-in pension money –Recent developments in Manitoba
Changes in January 2003:– LIF maximum withdrawal amounts based on
prescribed annuity factors, LRIF factors unchanged
– LIF requirement to purchase an annuity at age 80 removed
Changes in May 2005:– LIF or LRIF owners aged at least 55 may apply
for a one-time Prescribed Transfer to a Prescribed RRIF
24
Locked-in pension money – Ontario 2007 budget provisions
25% unlocking of locked-in accounts Amended maximum withdrawal schedule for
LIFs The new LIF replaces all existing LIFs and
LRIFs No annuitization requirement Complete unlocking at age 90 Pension income splitting when Federal
proposals receive Royal Assent
25
Locked-in pension moneyIssues for your client
Rules vary dramatically from Province to Province
LIF maximum withdrawal factors can also show significant differences
In theory any unlocking of pension money adds to the flexibility
Initial experience is that paternalism was not necessary
But what guidance does your client need?
26
In summary
The tax and legislative context is changing These changes can easily influence the
balance between options available Keeping on top of these changes can be a
challenge Hopefully this presentation has helped!
27
If you want to contact me
Phone: (416) 815-7200
Email: plonghurst@plasi.ca
Website: www.plasi.ca
Patrick Longhurst
28
Questions???
Recommended