1 cifps annual conference – june 2007 pensions update patrick longhurst, cfp, fcia

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CIFPs Annual Conference – June 2007

Pensions UpdatePatrick Longhurst, CFP, FCIA

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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?

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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

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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

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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

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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!

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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?

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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!

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If you want to contact me

Phone: (416) 815-7200

Email: plonghurst@plasi.ca

Website: www.plasi.ca

Patrick Longhurst

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Questions???