CIFPs Annual Conference – June 2007
Pensions Update
Patrick Longhurst, CFP, FCIA
1
My 2006 presentation –
Three central issues
1.
2.
3.
2
Does the client fully understand the
implications of the choices available?
What is special about him/her that will
influence the decision?
Have you looked at the overall context in
which the decision should be made?
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
3
Benefits payable upon
death, disability or
termination of employment
Other postretirement benefits
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 :




4
Mortality?
Investment returns?
Earnings increases?
Spousal details?
3. Pension Decisions in Context
Other
Pensions
Income
sharing
strategy
Registered
Investments
When to retire
What form of pension
Attitude to
risk
Whether to buy back service
Lump-sum or annuity
When to take CPP/QPP
Vision of
Retirement
Other
Income
Sources
5
NonRegistered
Investments
PostRetirement
Benefits
Spousal
Assets
Key feedback




6
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!
Recent / impending developments


The Tax Fairness Plan – Pension splitting
The 2007 Federal Budget:
–
–

Locked-in vehicles – LIRAs, LIFs and LRIFs:
–
–
7
RRSP maturity dates
Phased Retirement
Provincial variations
The trend to unlocking
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:




8
Income from an RPP
Income from an RRSP annuity
Payments under a RRIF
Proposed to be effective in 2007
Pension income splitting –
What can we expect?





9
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
Pension income splitting –
Other implications




10
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
Pension income splitting Example








11
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
Pension income splitting Example
Total Tax Paid
12
Year
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
Pension splitting –
Issues for your client





13
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
Federal Budget 2007 –
RRSPs and RPPs





14
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
RRSPs and RPPs –
Issues for your client

You will probably need some modeling. Issues
include:
–
–
–
–

15
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 nonregistered savings?
Is the claw-back an issue?
Generally, this makes LIRAs more attractive by
increasing their flexibility
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:




16
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
Phased retirement illustration





17
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
Phased retirement Illustration
Year
Pension 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
18
527,000
Phased retirement –
Issues for your client





19
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
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:



20
Minimum withdrawals like a RRIF
Maximum withdrawals based on a formula
Must be converted to an annuity by age 80
Locked-in pension money –
Historic position (Continued)

In some Provinces Locked-in Retirement
Income Funds (LRIFs) were also introduced:
–
–
–

21
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
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
–
–
–
22
A one-time 50% unlocking option
A new LIF with no life annuity requirement and
increased maximum withdrawal factors
LRIFs are to be discontinued
Locked-in pension money –
Recent developments in Manitoba

Changes in January 2003:
–
–

Changes in May 2005:
–
23
LIF maximum withdrawal amounts based on
prescribed annuity factors, LRIF factors
unchanged
LIF requirement to purchase an annuity at age 80
removed
LIF or LRIF owners aged at least 55 may apply
for a one-time Prescribed Transfer to a Prescribed
RRIF
Locked-in pension money –
Ontario 2007 budget provisions






24
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
Locked-in pension money
Issues for your client





25
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?
In summary




26
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!
If you want to contact me
Patrick Longhurst
Phone: (416) 815-7200
Email: plonghurst@plasi.ca
Website: www.plasi.ca
27
Questions???
28