Retiring Allowance Planning When You Leave Your Employer

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The NavigatorRetiring Allowance Planning When You Leave Your EmployerLeaving an employer can often be an emotional time. Whether you are leaving your employment voluntarily or involuntarily, there are generally three main financial issues that need to be considered: 1) retiring allowance planning, 2) pension plan options and 3) salary continuance and company benefits. It is important to carefully evaluate the options presented to you as the decision is often irreversible.

This article will discuss retiring allowance planning when you leave your employer and the special tax rules provided in the Canadian Income Tax Act (the Act) that may allow for a tax deferral through a rollover to your RRSP. Ask your RBC advisor for our articles on pension plan options, salary continuance and company benefits if applicable to you.

This article outlines several strategies, not all of which will apply to your particular financial circumstances. The information is not intended to provide legal or tax advice. To ensure that your own circumstances have been properly considered and that action is taken based on the latest information available, you should obtain professional advice from a qualified tax advisor before acting on any of the information in this article.

What is a RetiRing alloWance

A retiring allowance is an amount paid to an employee upon termination of employment. The amount of your retiring allowance is usually based on your length of service and position within the organization. It is common to hear the terms retiring allowance and severance package being used interchangeably but they are different. A retirement allowance is one component of a severance package which may also include other

payments, benefits and incentives.

The distinction is important because payments that meet the definition of a retiring allowance may qualify for the special tax treatment the Act provides.

Payments that qualify as a retiring allowance include:

■■ payments for unused sick leave credits on termination; and

■■ amounts individuals receive when their office or employment is

terminated, even if the amount is for damages (such as wrongful dismissal) when the employee does not return to work.

Payments that do not qualify as a retiring allowance include:

■■ a superannuation or pension benefit;

■■ an amount an individual receives as a result of an employee’s death (these payments may be treated as death benefits);


■■ a benefit derived from certain counselling services;

■■ unused vacation;

■■ pay in lieu of termination notice; and,

■■ damages for violations or alleged violations of an employee’s human rights awarded under human rights legislation to the extent these damages are not taxable.

eligible RetiRing alloWance

Special tax rules contained in the Act allow the portion of the retiring allowance that qualifies as an “eligible” retiring allowance to be transferred to your RRSP on a tax-deferred basis without requiring unused RRSP contribution room. The portion that does not qualify, the non-eligible retiring allowance, can only be contributed to your RRSP if you have unused RRSP contribution room.

The eligible portion of your retiring allowance is determined by your employer using the following formula, which is based on years of service as follows:

Eligible Retiring Allowance = the smaller of the two following amounts:

i) The actual amount you receive as a retirement allowance; or,

ii) The sum of:

a) $2,000 for each year or part of a year before 1996 where you worked for the employer,

plus

b) $1,500 for each year or part of a year before 1989 of that employment in which none of your contributions to your pension plan or DPSP were vested in your name when the retiring allowance is being paid (i.e. generally if you were not

a member of a pension plan or DPSP for years before 1989 then you may be eligible for this additional $1,500 per year).

An eligible retiring allowance may be paid to you, in whole or in part, directly or transferred to your RRSP. When it is transferred directly to your RRSP, your employer is not required to withhold tax on the payment. Keep in mind, if it is paid to you directly the amount paid will be net of withholding tax.

You can still benefit from the special rollover rules if the eligible retiring allowance is paid to you directly provided you make a contribution to your RRSP within 60 days from the end of the year you received it. However, since there was withholding tax on the eligible retiring allowance received, in order to contribute the gross amount to your RRSP (so that you can maximize the amount contributed without using unused RRSP contribution room) you will need to supplement the contribution with other sources of funds.

Note: to qualify under the special rules that allow the transfer without using unused RRSP contribution room, the eligible retiring allowance must be transferred to the RRSP of the individual receiving the retiring allowance (i.e. an RRSP where that individual is the annuitant). Eligible retiring allowances cannot be transferred to a spousal RRSP under the special rules.

non-eligible RetiRing alloWance

Although the non-eligible retiring allowance does not qualify under the special rollover rules, you can still make an RRSP contribution to your own RRSP or to a spousal RRSP to defer the payment from tax, provided you have

sufficient unused RRSP contribution room and the contribution is made within 60 days from the end of the year you received it. Your unused RRSP contribution room will be reduced by the amount of the contribution.

Your employer may be willing to contribute the gross amount, in whole or in part, directly to your RRSP or to a spousal RRSP based on your unused RRSP contribution room. This can be done without withholding tax by means of a direct transfer. Your employer may require reasonable proof that you have available RRSP contribution room in order to forego withholding tax. A copy of your Notice of Assessment for the previous year showing your RRSP deduction limit might be sufficient for this purpose. Even if you provide this proof, your employer may exercise its discretion not to make a direct transfer to your RRSP.

If your employer intends to withhold tax on the payment, you may wish to consider filing Form T1213 – Request to Reduce Tax Deductions at Source for Year(s), with the Canada Revenue Agency (CRA) to ask for approval to remove the requirement for withholding. Once the application is approved by the CRA, you can provide your employer with the approval. This will allow your employer to make the payment without withholding tax. Filing form T1213 should be considered if you have sufficient time before the payment will be made since it could take several weeks to receive the approval.

If your employer withholds tax and you make a contribution to your RRSP or to a spousal RRSP, you will receive a refund of the withholding tax when your personal income tax return is assessed, or the amount will offset the tax owed on other income on your tax

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If you have received an eligible retiring allowance and you have contributed this amount to

your RRSP, you must report the RRSP contribution as a transfer on line 14 of Schedule 7 on your

personal income tax return.

return, thus resulting in less taxes owed on your assessment.

tax RepoRting

When withholding tax is required, the withholding rate is the same as for RRSP withdrawals made by Canadian residents and is shown in the table below.

When your employer initially advises you of the amount of your retirement allowance, you may not be told what amount is an eligible retiring allowance. However, your employer is required to determine the eligible and non-eligible retiring allowance amounts for reporting on your T4 slip. Your employer must issue this slip to you no later than the last day of February following the year the allowance is paid. Since the CRA allows the special tax treatment only for the eligible retiring allowance reported by your employer, you should ensure this amount was correctly reported on the T4 slip.

The retiring allowances (eligible and non-eligible) reported on your T4 slip are included on your personal tax return on line 130 as other income. Any direct or indirect contribution to your RRSP or spousal RRSP will result in a receipt being issued by the financial

institution for the contribution. This RRSP contribution will result in a deduction to offset the income reported from the retiring allowance.

It is important to note that if you have received an eligible retiring allowance and you have contributed this amount to your RRSP, you must report the RRSP contribution as a transfer on line 14 of Schedule 7 on your personal income tax return. This will ensure the contribution does not use your unused RRSP contribution room.

Financial planning consideRations

It is not necessary to transfer the eligible retiring allowance to your RRSP under the special tax rules. There may be other more important uses for the funds or there may be other tax planning strategies to consider.

otheR Uses FoR the FUnds

You can request that all or part of the eligible retiring allowance be paid out in cash, subject to withholding tax, if there are other more important needs for the funds. For example, you may require the amounts to live on before finding a new job, to pay down debts or to fulfill other goals. If you are unsure whether you will require the retiring

allowance to support your current expenses, there still may be some value in making the rollover while you can and then withdrawing or deregistering the RRSP funds as necessary. This may allow you to take advantage of some tax-deferred growth of the funds. Speak to your RBC advisor for assistance in determining the best use of the funds.

income splitting

One goal in financial planning is often for couples to try to equalize their total incomes to be the most tax-efficient. The ability to transfer 50% of qualifying income to your spouse under the pension income splitting rules may not be enough to achieve an equal split of total income. This may be the case where one spouse has a larger amount of non-registered assets than the other. A spousal RRSP allows you to split future income without the limitations imposed by the pension income splitting rules. If you have a large unused RRSP contribution limit that you may not otherwise be able to utilize and you would like to take advantage of a spousal RRSP, you may want to transfer as much of your retiring allowance as your unused RRSP contribution limit will allow directly into a spousal RRSP, even if some of your retiring allowance is an eligible retiring allowance. The ability to split the future income and the resulting tax savings of this strategy may outweigh the benefit of transferring eligible retiring allowance to your RRSP without using unused RRSP contribution room. Speak with a tax advisor for assistance.

Retirement allowance amount

Province other than Quebec

Province of Quebec*

$0 - $5,000 10% 21%

$5,001 - $15,000 20% 26%

$15,001 and over 30% 31%

* For Quebec the withholding tax is composed of a provincial amount of 16% for all withdrawal amounts plus a federal amount that varies to equal the totals shown.

This document has been prepared for use by the RBC Wealth Management member companies, RBC Dominion Securities Inc. (RBC DS)*, RBC Phillips, Hager & North Investment Counsel Inc. (RBC PH&N IC), RBC Global Asset Management Inc. (RBC GAM), Royal Trust Corporation of Canada and The Royal Trust Company (collectively, the “Companies”) and their affiliates, RBC Direct Investing Inc. (RBC DI) *, RBC Wealth Management Financial Services Inc. (RBC WM FS) and Royal Mutual Funds Inc. (RMFI). Each of the Companies, their affiliates and the Royal Bank of Canada are separate corporate entities which are affiliated. *Members-Canadian Investor Protection Fund. “RBC advisor” refers to Private Bankers who are employees of Royal Bank of Canada and mutual fund representatives of RMFI, Investment Counsellors who are employees of RBC PH&N IC, Senior Trust Advisors and Trust Officers who are employees of The Royal Trust Company or Royal Trust Corporation of Canada, or Investment Advisors who are employees of RBC DS. In Quebec, financial planning services are provided by RMFI or RBC WM FS and each is licensed as a financial services firm in that province. In the rest of Canada, financial planning services are available through RMFI, Royal Trust Corporation of Canada, The Royal Trust Company, or RBC DS. Estate & Trust Services are provided by Royal Trust Corporation of Canada and The Royal Trust Company. If specific products or services are not offered by one of the Companies or RMFI, clients may request a referral to another RBC partner. Insurance products are offered through RBC Wealth Management Financial Services Inc., a subsidiary of RBC Dominion Securities Inc. When providing life insurance products in all provinces except Quebec, Investment Advisors are acting as Insurance Representatives of RBC Wealth Management Financial Services Inc. In Quebec, Investment Advisors are acting as Financial Security Advisors of RBC Wealth Management Financial Services Inc. RBC Wealth Management Financial Services Inc. is licensed as a financial services firm in the province of Quebec. The strategies, advice and technical content in this publication are provided for the general guidance and benefit of our clients, based on information believed to be accurate and complete, but we cannot guarantee its accuracy or completeness. This publication is not intended as nor does it constitute tax or legal advice. Readers should consult a qualified legal, tax or other professional advisor when planning to implement a strategy. This will ensure that their individual circumstances have been considered properly and that action is taken on the latest available information. Interest rates, market conditions, tax rules, and other investment factors are subject to change. This information is not investment advice and should only be used in conjunction with a discussion with your RBC advisor. None of the Companies, RMFI, RBC WM FS, RBC DI, Royal Bank of Canada or any of its affiliates or any other person accepts any liability whatsoever for any direct or consequential loss arising from any use of this report or the information contained herein. ® Registered trademarks of Royal Bank of Canada. Used under license. © 2016 Royal Bank of Canada. All rights reserved. NAV0141-EN (02/2016)

Please contact us for more information about the topics discussed in this article.

delaying the payment

For tax planning purposes, your employer may be willing to allow you to defer the receipt of your retiring allowance to a future tax year which may be beneficial if a portion or all of the retiring allowance is non-eligible and you do not have unused RRSP contribution room, or you choose not to contribute the payment to your RRSP. The deferral will be beneficial if your total income is lower in the future tax year in which the payment is received. However, if the company you are leaving is in any financial difficulty, or there is any other reason to question whether payment will be received, it may be advisable to receive the whole payment now to avoid any risk for non payment.

otheR impoRtant Facts on RetiRing alloWances

■■ You may only be entitled to an eligible retiring allowance once you have been terminated or have

retired. If you terminate your employment but are re-employed with the same company soon after, even as a consultant, the status of the payment as a retiring allowance may be jeopardized.

■■ Contributing your eligible retiring allowance to your RRSP is not permitted if you are turning 72 or older in the year of receipt and are thus not permitted to have an RRSP.

■■ Your eligible retiring allowance must be contributed to your RRSP on or before 60 days after the end of the year that the retiring allowance was received. If it is not contributed to your RRSP before the deadline, the ability to make the contribution without using unused RRSP contribution room is lost forever.

■■ It is important to note that amounts you receive as a retiring allowance (eligible or non-eligible) are not considered as earned income for the

purpose of calculating next year’s RRSP contribution limit.

■■ The retiring allowance you receive, whether contributed to an RRSP or not, may delay the receipt of Employment Insurance (EI) benefits, if you qualify for them.

■■ You cannot designate any portion of the eligible retiring allowance contributed to your RRSP as a Home Buyers’ Plan or Lifelong Learning Plan repayment.

consideR yoUR options and plan accoRdingly

Careful planning can go a long way to ease the transition from employment. Take into consideration your cashflow needs (immediate and long-term) and remember to maintain flexibility since circumstances are always changing. Your RBC advisor can assist you in addressing many of these issues.



The NavigatorSalary Continuance and Company Benefits When You Leave Your EmployerLeaving an employer can often be an emotional time. Whether you are leaving your employment voluntarily or involuntarily, there are generally three main financial issues that need to be considered: 1) retiring allowance planning, 2) pension plan options and 3) salary continuance and company benefits. It is important to carefully evaluate the options presented to you as the decision is often irreversible.

This article will discuss salary continuance and company benefits that may be available to you when your employment with the company ends. Ask your RBC advisor for our articles on retiring allowance planning and pension plan options if applicable to you.

This article outlines several strategies, not all of which will apply to your particular financial circumstances. The information is not intended to provide legal or tax advice. To ensure that your own circumstances have been properly considered and that action is taken based on the latest information available, you should obtain professional advice from a qualified tax and legal advisor before acting on any of the information in this article.

Salary ContinuanCe

Your employer may offer you the option to receive a salary continuance instead of receiving a lump-sum severance payment or retiring allowance. With salary continuance, your salary will generally continue until the earlier of a specified period of time or until an event such as finding new employment occurs.

Salary continuance may be preferable to receiving a lump-sum amount if you are more comfortable receiving a regular source of income. In some

cases, company benefits such as drug, dental, life insurance and pension service will continue during salary continuance, whereas these benefits may not continue if a lump-sum cash payment is chosen.

Salary continuance provides cash flow to fund ongoing expenses and only amounts actually paid in the year are subject to taxation. When choosing whether to receive salary continuance or a lump-sum payment, consideration should be given to the total taxable income you will receive during the

current year and possibly future tax years under each option. Tax may be minimized by choosing the option that allows you to make the most of the graduated tax rates in the current and future tax year(s).

Tax deferral may result if payment is received in a future tax year. You may also be able to achieve tax deferral where the lump-sum payment is considered an “eligible” retiring allowance or if you have sufficient unused RRSP contribution room and contribute the payment to your


Salary continuance

provides cash flow to

fund ongoing expenses

and only amounts

actually paid in the year

are subject to taxation.

RRSP. Salary continuance is reported as regular employment income and is not considered to be an eligible retiring allowance. Retiring allowances are discussed in our separate article Retiring Allowance Planning When You Leave Your Employer. Ask your RBC advisor for a copy of the article if you would like more information.

Flexibility of the payment options and your personal financial situation should also be considered. It may be possible to receive a lump-sum payment that can be used to fund expenses and/or pay off debt sooner.

If there is a risk that the company you are leaving is in financial difficulty, or if the terms of your salary continuance make it likely you will not receive the full schedule of payments (for example if you may be re-employed in the near future), it may be advisable to receive the lump-sum payment.

Another consideration is that salary continuance qualifies as earned income for purposes of creating new RRSP contribution room for the following year. Conversely, a lump-sum retiring allowance is not considered earned income and therefore no new RRSP contribution room will be created.

anCillary BenefitS or inCentiveS

The importance of ancillary benefits or incentives offered by your company when you leave or when you retire should not be overlooked. In some cases, your employer may offer continued access to group plans such as health, dental or life insurance on the condition that you remain a member of the company pension plan. This is something that you should investigate and consider carefully.

Check with your company’s benefits

representative or human resources specialist to find out the conditions and length of coverage, and if it is possible to convert to personal coverage at your own expense.

If your company benefits will cease upon leaving your employer, check to see if you may qualify for benefits under your spouse or partner’s employee group benefits. Below are some of the common considerations for the different types of benefits or incentives that may be available.

MediCal and dental BenefitS

Some companies may continue to offer medical and dental benefits for their retirees. However, they are generally not as generous as they were when you were employed and there may be additional costs. Other companies will offer these benefits only for a specified period of time.

Generally, employees who have opted to transfer their pension out from the employer and take a lump-sum payment will not be eligible for these types of company benefits.

When you are entitled to medical and dental benefits, make sure you are aware of what the benefits will be and evaluate whether or not you will need to enhance your coverage to suit your lifestyle. For example, will you have out of country coverage if you travel outside the country?

Should you find yourself without benefits after leaving your employer, you could arrange personal coverage through another provider to maintain protection. This can be a cost effective decision in the long run, as medical or dental bills can be substantial.

life inSuranCe

One area of concern to many employees is life insurance coverage.


Employees who have opted to transfer their pension out from the employer and take a lump-sum

payment will not be eligible for these types of company benefits.

Upon leaving a group plan, you may be eligible to convert your group coverage to private coverage within a specified time frame provided by the insurer.

The benefit of this option is that the conversion may be done without a medical exam; however, the premiums charged will likely be greater than those paid as an employee. Individuals in good health may opt to have a medical examination and get private coverage instead of converting their group insurance. You should compare the cost of private coverage to the cost of the converted group coverage to determine which is most beneficial (assuming that the same types of coverage are being compared). It is also important at this point to assess how much life insurance coverage you require. All of these issues should be discussed with a licensed life insurance representative.

third Party ServiCeS

Some employers will offer terminated employees counseling, resume writing or job placement services through third-party providers. These services

are designed to help terminated employees attain re-employment sooner.

CorPorate vouCherS or diSCountS

Occasionally, companies will give terminated employees vouchers that may be used to purchase company products or services. These kinds of benefits are taxable and are usually reported by the company on a tax slip when the voucher is used.

Instead of vouchers, discounts are sometimes offered to retirees for company products and services and are generally not a taxable benefit although they usually have an expiration date.

ConSider your oPtionS and Plan aCCordingly

Careful planning can go a long way to ease the transition from employment. Take into consideration your cashflow needs (immediate and long-term) and remember to maintain flexibility since circumstances are always changing. Your RBC advisor can assist you in addressing many of these issues.





The NavigatorPension Plan Options When You Leave Your EmployerLeaving an employer can often be an emotional time. Whether you are leaving your employment voluntarily or involuntarily, there are generally three main financial issues that need to be considered: 1) retiring allowance planning, 2) pension plan options and 3) salary continuance and company benefits. It is important to carefully evaluate the options presented to you as the decision is often irreversible.

This article will discuss four common options for a pension plan that may be available when employment has ended. Ask your RBC advisor for our articles on retiring allowance planning and salary continuance and company benefits if applicable to you.

This article outlines several strategies, not all of which will apply to your particular financial circumstances. The information is not intended to provide legal or tax advice. To ensure that your own circumstances have been properly considered and that action is taken based on the latest information available, you should obtain professional advice from a qualified tax advisor before acting on any of the information in this article.

Reviewing YouR options

If you have been a member of a pension plan for many years, the benefits that you have earned in the plan may be the largest source of income you will receive in retirement. When you leave your employer, your pension plan administrator will send you a written summary outlining your company pension plan options. You will be required to select one of the options by a specific deadline. Sometimes you may not have very much time to make your decision. Generally if you do not act before

the deadline, the administrator may consider that you have chosen one of the options by default, which may or may not be the best option for you.

Your pension plan options, including when you will receive the money, how much money you will receive and how your spouse and other dependants may be affected, will all depend on your specific pension plan as well as the applicable legislation that governs the benefits you have accumulated.

Speak to your pension and benefits representative to find out what options

are available to you when you leave your employer. Your RBC advisor together with a qualified tax advisor can assist you with making the most appropriate choice for your specific circumstances.

The options available vary significantly from one plan to another. Some of the more common options include:

option 1: Remain in the pension plan

You may be able to stay in the company’s defined benefit (DB) or defined contribution (DC) pension


You may be able to

stay in the company’s

defined benefit (DB) or

defined contribution

(DC) pension plan, but

will no longer be able to

make contributions.

plan, but will no longer be able to make contributions. This option may provide benefits and incentives such as indexing to inflation or continued access to group health, dental and insurance plans.

Some severance packages will offer pension inducements, such as added years of service, depending upon your age and position. These benefits can make remaining in the pension very appealing so it is important to understand the package.

immediate oR defeRRed

Depending on your age at the time you stop working, you may have the choice of beginning your pension benefits immediately or deferring the benefits until a later date. DB pension plan payments are one of the few types of pension income that you can receive before age 65 that qualify for pension income splitting with your spouse as well as the $2,000 pension income tax credit.

You may be given a choice to delay receiving your pension to a later date and if you do, you will generally receive a higher monthly amount than you would if you took your pension immediately. If you have not yet reached the age at which the plan allows you to receive benefits, or if you will have new employment or alternate sources of income and do not need the pension income immediately, you may want to consider choosing a later date to receive your pension, if your plan provides you with the option to do so.

spousal and suRvivoR Benefits

If you have a spouse (as defined in your plan), he or she may be entitled to receive survivor benefits following your death, usually at a reduced level, for the remainder of his or her lifetime. Your pension plan administrator may

provide you with the option to select enhanced survivor benefits for your spouse — but there’s a cost. Typically, if you opt for enhanced survivor benefits, the initial amount of your pension benefits will be lower.

Choosing the appropriate level of survivor benefits is a critical decision. The age, health and life expectancy of you and your spouse should be considered carefully. Also, the degree to which your spouse and any other dependants may need to rely on this income to meet their expenses is an important consideration.

BRidging Benefits

Many DB plans are designed to provide a higher level of benefits from the time that payments begin until the age at which certain government benefits, such as the Canada or Quebec Pension Plan (CPP/QPP) and Old Age Security (OAS) are scheduled to start (usually age 65), and a reduced level of benefits afterwards. Pension plans that are designed this way are referred to as being “integrated” or “bridged” with CPP/QPP or OAS. Your ability to apply for CPP/QPP early and the value of the benefit you will receive is not affected by receiving a bridged pension benefit.

Knowing how your plan is designed will help you make the right choices about when and how to draw on your other sources of retirement income. Some plans may contain benefits specific to your province of employment that you need to consider carefully.

Risks

defined Benefit (dB) plans:

A DB plan is often viewed as being less risky than a DC plan since the employer is obligated to make up investment shortfalls in the plan with additional contributions. The employer takes on the investment risk in a DB


A DB plan is often viewed as being less risky than a DC plan since the employer is obligated to

make up investment shortfalls in the plan with additional contributions.

plan if there are any shortfalls. This ensures that you would get the benefits you were promised as the pension is based on a fixed formula and not on investment returns.

A shortfall in a DB plan is usually referred to as a deficit and is usually the result of bad investments, general market conditions or an increase in the plans liabilities. Companies that sponsor a DB pension plan that is in a deficit position will be required to make increased contributions to bring the plan back to fully funded status.

Your DB plan can be at risk if the company sponsoring the plan runs into cash flow problems and cannot make the required payments. Although the pension funds are segregated and cannot be seized by a company’s creditors, if the company goes bankrupt while there is a pension deficit, your promised or current pension benefits can be reduced.

If you leave your DB pension with your employer, you have to be comfortable the company will remain financially viable and able to pay your expected retirement benefit.

defined ContRiBution (dC) plans:

A DC plan has no mechanism to make additional contributions if the market goes through a bad spell and the plan value drops. If the value of your pension plan drops just before

retirement, your pension will provide a lower income stream in retirement than you may have expected as there are less funds available. You assume the investment risk with a DC plan.

Your sponsoring company generally provides you with various investment choices. If you leave your DC plan with your employer, you need to be comfortable that the investment choices available will help you reach your desired retirement income.

Your RBC advisor, together with your pension and benefits representative or human resources specialist, can help you decide if remaining in the pension plan is best for you and if so help you to work through these important decisions.

option 2: puRChase an annuitY

You may be able to instruct your pension plan administrator to transfer the value of your pension to an insurance company to buy an immediate or deferred annuity. The annuity will pay you a set income beginning at the age set out in the annuity contract. The insurance company assumes all of the investment risk once the annuity is purchased as your payments are guaranteed. Annuities are also protected by Assuris, which is a not-for-profit organization that protects Canadian policyholders if their life insurance company should become insolvent.


Annuity contracts are

available with many

different features and

benefits. They produce

a predictable, recurring

income stream and

allow you to customize

the amount of income

payable to a surviving

spouse.

Annuity contracts are available with many different features and benefits. They produce a predictable, recurring income stream and allow you to customize the amount of income payable to a surviving spouse.

You will not have any control over the management of the funds once the contract is purchased and the decision to have it reversed is not possible.

The income provided by the purchase of an annuity should be compared with the projected income provided by the other available options.

option 3: tRansfeR YouR pension value to a lRsp/liRaA third option allows you to invest the money yourself and decide when you want to begin withdrawing it, subject to age restrictions and annual minimum and maximum amounts. This requires the pension plan administrator to calculate and transfer the commuted value of your pension to a locked-in RRSP (LRSP) or a locked-in retirement account (LIRA).

In order to receive a retirement income, you will need to convert your LRSP/LIRA to a Life Income Fund (LIF), annuity (refer to option 2), Locked-in Retirement Income Fund (LRIF), Prescribed Retirement Income Fund (PRIF) or Restricted Locked-in Income Fund (RLIF). Ask your RBC advisor for more information on the types of plans available for the pension plan you have.

Once you transfer the pension funds to a LRSP/LIRA you have a wide range of investment choices available. The value of your locked-in plan will fluctuate directly with your investment returns and you must be comfortable taking on the investment risk. Fortunately, there are so many choices in a LRSP/LIRA that you can likely choose an

investment that is suitable to your level of risk tolerance.

Managing your pension money yourself gives you more flexibility and control than remaining in the pension plan or purchasing an annuity as follows:

■■ Funds can grow tax-sheltered, until you are required to begin making withdrawals in the year you turn 72.

■■ Withdrawals may begin as early as the age your pension would have started.

■■ If you began receiving income but no longer need it, you may be able to stop receiving income by transferring the funds back into a LRSP/LIRA before the year you turn 72. However, the ability to do this varies by provincial and federal legislation.

■■ You can choose from a wide range of investments to achieve your specific income and retirement objectives and have your RBC advisor design a portfolio that is customized to your specific objectives in terms of producing income, offering growth and providing liquidity.

■■ Each year, you may decide to receive more or less income, within minimum and maximum amounts, giving you greater control over your taxable income. This may help you maintain your eligibility for government benefits like Old Age Security (OAS) or the Guaranteed Income Supplement (GIS).

■■ Some strategies are available to unlock certain amounts of money held in a locked-in plan and transfer them to a regular registered plan where withdrawals are not restricted.

■■ You can use part of your locked-in funds to purchase an annuity contract at any time.


You can choose from a wide range of investments to achieve your specific income and retirement

objectives and have your RBC advisor design a portfolio that is customized to your specific

objectives.

The Income Tax Act may limit the amount of pension money you can transfer to a locked-in RRSP or LIRA. In this case, your pension plan administrator will inform you that a portion of your commuted value will be paid to you as a taxable cash payment. If the value of your pension exceeds the amount that can be transferred, the balance that you are owed will generally be paid to you in a lump sum and taxed in the year it is paid.

While receiving a taxable amount may appear to be a drawback, consider the following:

■■ In many cases a lump sum of money is needed for immediate uses such as repaying debt before you retire or funding a large expense, purchase or other project.

■■ If you have unused RRSP contribution room, you may be able to make a contribution to your individual plan or spousal plan, where appropriate. This could defer the taxation of part or all of the lump sum that you receive and allow for income splitting with your spouse.

option 4: tRansfeR YouR pension to a new emploYeR

In some cases, if you are not retiring, you may be able to transfer the vested amount of your pension into a new employer’s pension plan. If a new employer provides you with the option to participate in a DB pension plan, this transfer will involve exchanging some or all of the value of your pension for a certain number of years of “pensionable service” in the new plan. This is possible only if your new employer is willing to accept the transfer.

pension adjustment ReveRsal (paR)If you ceased being a member of a Registered Pension Plan (RPP) or a Deferred Profit Sharing Plan (DPSP) in 1997 or later and received the commuted (lump sum) value of your RPP or DPSP out of the plan and chose option 2, 3 or 4, you may now have extra RRSP contribution room due to the Pension Adjustment Reversal (PAR). If you receive a PAR amount, this value can be added to your current RRSP contribution limit. Ask your RBC advisor for our article on the Pension Adjustment Reversal if applicable to you.


If you receive a PAR

amount, this value can

be added to your current

RRSP contribution limit.

making the Best deCision foR YouR familY The following are the main considerations that are likely to influence your decision as to which pension plan option, or combination of options, is best for you and your family:

■■ Flexibility to access regular income and lump sums

■■ Benefits available to your surviving spouse or others upon death

■■ Investment management — degree of your involvement in making decisions

■■ Investment risk — impact of strong or weak investment performance on your retirement income

■■ Access to ancillary benefits that may be contingent on membership in the company pension plan


FlexibilitySurvivor Benefits and Estate Planning

Investment Management and Investment Risk

Option 1 Leave pension with employer

Limited or no ability to modify payments once they begin. Benefits are payable for life of annuitant.

Limited or no ability to access lump sums from the pension plan.

If pension payments have started, survivor spouse generally receives a reduced monthly payment for the remainder of their lifetime.

If plan member dies prior to pension payments beginning, the commuted value may be available to surviving spouse or beneficiary (-ies).

Defined Benefit (DB) investment decisions are made by pension plan administrator.

Defined Contribution (DC) investment decisions are made by plan member subject to limited choices.

Risk lies with pension plan administrator for a DB plan and lies with plan member for DC plan.

Option 2Purchase an annuity

Limited or no ability to modify payments once they begin.

Limited or no ability to access lump sums from annuity contract.

Details agreed to when annuity is selected. Various options are available to provide protection to surviving spouse and/or estate.

Insurance company assumes risk associated with investment performance.

Option 3 Transfer to a LIRA/ locked-in RRSP

Flexible amount of income may be taken each year, subject to minimum and maximum amounts and minimum age requirements.

Some flexibility to delay receipt of income and allow LIRA/locked-in RRSP to potentially grow in value, subject to age limits.

Some flexibility to withdraw lump sums and/or unlock funds for increased availability at a later date.

Surviving spouse may receive 100% of remaining plan value on a tax-sheltered basis.

Payable to estate or other beneficiaries if there is no surviving spouse. Estate is responsible for paying taxes.

In some provinces, surviving spouse may have increased access to lump sums (i.e. unlocking)

Annuitant may select desired degree of Annuitant may select desired degree of involvement and choose from wide range of investment solutions.

Annuitant benefits from strong investment performance and assumes risk of weak investment performance

Option 4Transfer to a new employer pension plan

If you terminate employment with your new employer and remain in that employer’s pension plan refer to option 1.

If you terminate membership in your new employer’s plan and purchase an annuity or commute to a LIRA or locked-in RRSP, refer to option 2 or 3 as applicable.





The table below summarizes the general implications of many of these considerations for each of the four pension options.

Summary Table of Pension Options



how do You Choose?When analyzing which pension option is best for you, the goal is to find the option that will provide you with the best cash flow throughout your retirement at a risk level that is acceptable to you.

You may want to choose the option that will provide the largest benefit to your spouse or to your estate upon your death. For instance, if the commuted value is transferred to a Locked-in RRSP or LIRA, any remaining assets in the plan upon your death can be transferred to a named beneficiary

(-ies) or your estate. If you decide to remain in the company’s pension plan and it is a DB pension plan, then upon your death, your spouse will generally receive a reduced annual pension for the rest of his/her life. If you have no surviving spouse upon your death, then it is possible that no further payments will be made to your estate. However, every pension plan is different; therefore, if survivor benefits are important, it is necessary to determine what benefits are available under the different pension options and weigh this information when choosing your option.

While it may seem difficult to know which option is best for you and your family, working with your RBC advisor, qualified tax advisor and pension and benefits representative or human resources specialist, may help you select the option that is best for you and your family. These advisors have access to a wide range of information and calculators that can help you analyze your options. They can prepare a customized analysis of your situation and make a recommendation based on all of the important considerations that are unique to your specific personal goals and circumstances.

Documents

Retiring Allowance Planning When You Leave Your Employer