WELCOME. Nortel Pension Plan Wind-up Option Seminar

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1 WELCOME Nortel Pension Plan Wind-up Option Seminar Contents 1 Introduction and Overview 2 Tax Rules 3 Process 4 Pros and Cons 5 Case Studies 2 Pension Wind-up Seminar Part I and Part II of the managerial non-negotiated pension plan For service while working in the Province of Ontario 3 Marc Lamontagne, CFP, R.F.P., CIM Financial Planner

2 Established in 1994 Ottawa s largest fee based financial planning and wealth management firm CFP Professionals Developed the Nortel Charting Your Course seminars and both pension elections seminars Clients: emerging affluent to HNW Services: financial planning, tax services, portfolio management 4 Disclaimer The material provided in this seminar is for information purposes only and should not be construed as advice. We encourage you to contact your pension plan administrator, account custodians, and your own certified financial planner before taking any action. 5 Pension Plan Options Nortel Pension Plan Annuity Fixed amount for life 60% spousal benefit (if applicable) Commuted Value Transferred to a locked-in account A portion may be taxable 6 2

3 Tax Rules Marginal tax brackets RRSP contribution room Cash in excess of transfer limit Taxes Pension Adjustment Reversal LIF minimum and maximum Pension income splitting 7 Marginal Tax Brackets 8 Registered Retirement Savings Plan Contribution room based on earned income Carry forward of unused room Tax deduction based on marginal tax rates Terminates the year you turn 71 Possible PAR if you elect the Commuted Value (CV) 9 3

4 Pension Adjustment Reversal (PAR) Only applicable to Non-retirees Total Pension Adjustments (PA) exceed lump sum Restores RRSP contribution room Contact CRA for PA history & send to MS MS will issue PAR post-estate settlement Otherwise will result in PAR amendment and may require withdrawal of excess RRSP contributions 10 Pension Income Splitting Pension Income You Annual Election Spouse 50% to 100% 0% to 50% 11 Pension Income Eligible for Splitting Pre-age 65 Pension Annuity purchased from a pension Elected split-pension Post-age 65 All pre-age 65 income RRIF/LIF Regular annuity Foreign pension* * Certain limitations may apply. 12 4

5 LIF Minimum and Maximums AGE Minimum Maximum % 6.45% % 6.77% % 7.25% % 8.02% % 9.33% % 11.96% 13 Cash in Excess of Pension Transfer Cash in excess of pension transfer limit Max LIRA/LIF transfer = Age factor X pension at 65 Age factor range from 9 to 12.4 Can transfer directly to an RRSP (if room available) Withholding tax Withholding on lump sum payments* $0 - $5,000 = 10% $5,001 - $15,000 = 20% Over $15,001 = 30% *Ontario resident 14 Pension Plan Option Process Nortel Pension Plan Annuity Default option No income interruption Commuted Value Transferred to a locked-in account A portion may be taxable (Out-limit) 15 5

6 Current Retirees Annuity or Commuted Value (CV) CV amount to be determined based on age and current funding plus settlement, plus interest, plus Pension Benefit Guarantee Fund adjustment Annuity will be purchased from a Canadian life insurance company(ies) Annuity is default option 120 days to make a decision 16 Current Retirees Cash in excess of transfer limit Part I and Part II Pension + lump sum top up You LIF* LIF Income subject to min and max w/d Annuity You Buy annuity until age 85 *Not eligible for 50% unlocking Will cause income interruption Not eligible for a PAR 17 You Non-Retirees Deferred annuity or Commuted Value (CV) CV amount to be determined based on age and current funding plus settlement, plus interest, plus Pension Benefit Guarantee Fund adjustment Deferred annuity will be purchased from a Canadian life insurance company(ies) Annuity is default option 120 days to make a decision 18 6

7 Non-Retiree You Buy annuity until age 85 Cash in excess of transfer limit LIRA LIF or annuity LIF Income subject to min. & max. Part I and Part II Pension Possible PAR Between age 55 and 71 RRSP/ Age 55 or older RRIF 60 day rule 50% LIF unlocking rule You RRIF Income subject to min. only Deferred Annuity 19 Pros and Cons Life Income Fund (LIF) or Annuity Annuity Pros Income is guaranteed for life (Assuris) May have early retirement provision Spousal survivor benefit (60%) No investment risk No longevity risk No ongoing monitoring Cons One-time investment decision Low interest rate locked in No estate value* No opportunity to increase capital base over time No indexation * On wind-up the only option is a life-only annuity. *May have payment guarantee period, if single. 21 7

8 Life Income Fund Pros Retain control of capital On death, value of plan is transferred to spouse or estate Possible 50% unlocking Some control over income (indexation)* Cons Inherent investment risk Longevity risk Ongoing monitoring of the investments Income will fluctuate based on investment results Possible excess cash payment *Within the min. and max. annual income limits 22 LIF Portfolio Example Canadian Equities Preferred Shares Bonds Cash US Equities International Equities Risk Time Horizon Diversification Cash Flow 23 Current Retiree Case Study #1 John is 70, he is the survivor annuitant, has 3 adult children and been offered a CV of $325,000 or an Annuity of $2,296 per month Annual Annuity = 8.5% of CV Max LIF withdrawal is 8.02% A private annuity would pay 6% No excess limit 24 8

9 Amount 20/10/2016 Maximum LIF Payout - Case Study #1 25 Assumes a 6% RoR Maximum LIF Payout - Case Study #1 $350,000 $300,000 $250,000 $200,000 $150,000 $100,000 $50,000 $ Age Beginning LIF Capital After-Tax Maximum Payout Tax Payable on Maximum Payout Pre-Tax Maximum Payout Assumes a 6% RoR 26 Current Retiree Case Study #2 Mary is 76, married, has 3 adult children and been offered a CV of $460,000 or an Annuity of $3,300 a month $57,000 of the CV is taxable Annual Annuity = 8.5% of CV Max LIF income is 9.7% Estate Value Annuity income 60% for spouse LIF 100% to spouse 27 9

10 Non-Retiree Case Study #1 Bob is 55, divorced, has 2 adult children (one is disabled) and been offered a CV of $171,000 or a Deferred Annuity of $1,194 a month starting at age 65. $30,000 of the CV is taxable Max LIF income at 65 is 7.25% LIF/Excess cash value (after-tax) at 65 4% RoR = $230,918 (max LIF $1,395) 6% RoR = $279,372 (max LIF $1,688) 8% RoR = $336,792 (max LIF $2,035) 28 Buy an Annuity - Case Study #1 Bob wants to compare buying his own annuity at age 65 vs. $1,174 mo. LIF/Excess cash value (after-tax) at 65 4% RoR = $230,918 ($1,018 a month) 6% RoR = $279,372 ($1,238 a month) 8% RoR = $336,792 ($1,499 a month) 29 Buy an Annuity by Age - Case Study #1 Buy an annuity for $279,372 at various ages Single (5 year guaranty) Age 65 - $1,238 Age 70 - $1,454 Age 75 - $1,697 Married (60% survivor benefit) Age 65 - $1,093 Age 70 - $1,252 Age 75 - $1,

11 Amount Amount 20/10/2016 Non-Retiree Case Study #2 Riyaz is 51, married, has 2 adult children and been offered a CV of $77,000 or a Deferred Annuity of $815 a month starting at age 65. Max LIF income at 65 is 7.25% LIF value at 65 4% RoR = $123,000 (max LIF $743) 6% RoR = $155,000 (max LIF $936) 8% RoR = $195,000 (max LIF $1,178) 31 LIF Withdrawal - Case Study #2 What if Riaz withdraws $815 a month (same as annuity) from a LIF starting at age 65 and earns a 4% RoR. $140,000 $120,000 $100,000 $80,000 $60,000 $40,000 $20,000 $ Ignores LIF Minimum & Maximum Age 32 Capital at Start of Year After-Tax Income Interest Rate Sensitivity - Case Study #2 What if Riaz withdraws $815 a month (same as annuity) from a LIF starting at age 65 and earns a 6% RoR. $160,000 $140,000 $120,000 $100,000 $80,000 $60,000 $40,000 $20,000 $ Age 33 Capital at Start of Year Ignores LIF Minimum & Maximum 11

12 Amount 20/10/2016 Interest Rate Sensitivity - Case Study #2 What if Riaz withdraws $815 a month (same as annuity) from a LIF starting at age 65 and earns a 8% RoR. $1,100,000 $1,000,000 $900,000 $800,000 $700,000 $600,000 $500,000 $400,000 $300,000 $200,000 $100,000 $ Ignores LIF Minimum & Maximum Age 34 Capital at Start of Year Other Factors Health Financial Dependency Cash Flow Needs Estate & Legacy Considerations Ongoing Investment Management 35 Financial Planning Approach Health Taxes Estate Retirement Income Decision! 36 12

13 QUESTIONS? RLI Nortel Pension Wind-Up Seminars 38 THANK YOU! Marc Lamontagne, CFP, R.F.P., CIM