The retirement landscape in Canada, like the overall landscape of the Canadian economy continues to change especially given the ongoing chatter about retirement and estate planning readiness and the BIG transition of the largest age cohort in history the baby boomers into retirement. When it comes to retirement and estate planning, there is lots to consider; accumulating sufficient assets is one consideration, but once you get to retirement we need to think about options for receiving cash flow, the management of income-sensitive benefits and the tax-efficient transfer of assets across generations. When thinking about retirement in Canada, what does the retirement landscapse currently look like? How many people are retired, and what other factors do you consider? 6.4 million retired or semi-retired people in Canada -/5th of overall population 46% controlled circumstances surrounding retirement; 54% did not - 48% retired earlier, 6% later - due to circumstances beyond their control 48% of retirees worry about outliving their income; 74% of those still working have the same worry Average retirement age is 63 - Trending older - 62. in 200 *Source: Angus Reid Institue; 205 survey of,927 Canadian adults How affordable is retirement in Canada? How many retirees are living comfortably? According to the same survey performed by Angus Reid, 62% of retirees do not have enough money for extras or struggle to make ends meet. This is a BIG stat with a number of dangerous implications... what happens if there is an emergency or excessive healthcare costs arise? For those who rely primarily on government sponsored benefits, what happens if there is an unfavourable change in legislation and benefits?
If you consider an analogy of retirement income being the 3 wheels of a tricyle: Wheel # would consist of government-sponsored benefits such as OAS, C/QPP benefits, the guaranteed income supplement for lower income Canadians, and any available provincial supplements. Wheel #2 would be employer-sponsored benefits such as registered pension plans, locked-in RRSPs and LIFs, group RRSPs, group TFSAs and deferred profit sharing plans. Wheel #3 would be personal savings: RRSPs/RRIFs, TFSAs and non-registered savings as well as, dare we say it, any earnings from part-time employment or self-employment. For the average Canadian, what retirement income options are available? Those fortunate to have all 3 wheels are normally considered to have the comfort and stability of a tricycle.however, because of the declining availability of employer-sponsored plans and because many Canadians have not set aside enough money for personal savings, many are not riding tricycles in retirement they are riding bicycles, if not unicycles in their retirement years. In thinking about government benefits (OAS and CPP), once retired, how much pre-retirement income are government benefits meant to replace? By design, C/QPP and OAS together are meant to replace roughly 40% of the average national wage. The average national wage is roughly $50,000, so the maximum benefit under both plans is roughly $20,000 total. Now, indeed, those who have a smaller target retirement income, say $25,000, will have a much larger portion of their income funded by C/QPP and OAS, roughly 60% in this case. But, as target retirement income increases, say to $90,000, a much smaller portion of the income is funded by these benefits, roughly 0% in this case. The moral of the story is that while the public pension system (wheel #) appears to be (and is likely) on solid ground, government benefits will provide only a portion of one s desired retirement income. This means, for those who wish to have a higher target retirement income, wheels #2 (employment-sponsored benefits) and #3 (personal savings) must play a significant role. Many Canadians are not aware of this and particularly younger Canadians which creates an opportunity for advisors to continue to stress the importance of personal savings. Source: Stats Canada
How do recent changes to OAS and CPP impact current and future retirees? OAS - Facts & Figures (as of March 208) OAS benefits are available to Canadian citizens and residents at age 65 (subject to changes) The maximum monthly pension is $587, or roughly $6,900 per year. Many Canadians don t receive the maximum benefit as they have not lived long enough in Canada to receive it. Benefits are taxable and indexed for inflation. The earliest age one can receive the OAS benefit is currently 65. OAS benefits are income-sensitive, subject to a 5% clawback rate once net income reaches $75,90. Full OAS benefits are eliminated at a net income of $22,843. Source: Canada Revenue Agency; current as of March 208 Recent Changes to OAS. Age of Eligibility - Effective April 2023, age of eligibility was set to increase to 67 - New Liberal government not in favour of this change; returned eligibility to age 65 2. Option to defer - Can defer take-up for up to 5 years - Deferred pension means increased benefits in future - GIS benefits not eligible for actuarial adjustment v v When to take OAS - Factors to Consider Given the opportunity to defer, this leads to the question of factors to consider when deciding when to take OAS. As you know, one size does not fit all. Like C/QPP, personal circumstances and objectives play a HUGE role in defining the most suitable take-up time for OAS benefits. Factors to consider include: Life expectancy with a shorter life expectancy, it is often best to take the benefits sooner as opposed to later. If there is a family history of longer life, a deferral can create a larger aggregate lifetime benefit Do you need the cash? Maybe you are still working or have an investment, rental or other pension income. If you don t need the cash, deferral is an option. If the cash is needed, an early take-up is likely better. What will be done with earlier payments? If invested, can you realize a better return than the deferral option provides? What is your perception of the program? If you defer, given that government benefits can change at anytime, will expected benefits be available when needed? In addition to these factors, another factor might include the potential for an OAS clawback, subject to the client s net income at the time of take-up.
What about OAS clawbacks? When do they occur, and how can they be avoided? OAS benefits reduced; subject to income Reduction threshold: $75,90 $22,843 Clawback rate: 5% Example - $85,000 net income ($85,000 $75,90) x 5% $,364/year or $4/month What can be done to avoid clawbacks? Source: Canada Revenue Agency; current as of March 208. Deferring OAS take-up is possible. If you have not yet begun to receive your OAS benefit, you can consider a deferral in your income if it hovers around clawback territory. 2. T-class mutual funds: T-class funds provide return of capital (ROC) as a cash flow option. Because ROC is not reportable or taxable, cash flow can be realized with no impact to OAS benefits. 3. Another option is investing for capital gains instead of dividends: Corporate class funds can help with this as they were designed with tax-efficiency in mind. Because corporate class funds allow for tax-deferred switches between class funds and tend to pay less in taxable distributions than dividend paying funds or MFT counterparts, they tend to impact OAS benefits less. 4. Keep debt to a minimum: Doing so reduces the need for income to service the debt. 5. Consider spousal RRSPs, C/QPP sharing and pension income-splitting: Because OAS clawbacks are based on individual and not family income, these tools allow for a reduction of individually calculated clawbacks. 6. And, as you age, consider gifting: Where assets are gifted (including to adult children), future income from the gift accrues to the recipient allowing for the preservation of OAS benefits. Exceptions apply to gifts to a spouse, common-law partner or minor child. With the splitting of eligible pension income, what income is eligible and does age play a role? Indeed, Canadian tax legislation has rules designed to prevent income-splitting. However, as indicated, several government sanctioned vehicles allow splitting in certain cases. For purposes of retirees, the splitting of eligible pension income and the sharing of C/QPP come to mind. For purposes of eligible pension income, up to 50% of eligible income can be split between spouses/ CLPs. The question is, what defines eligible pension income? The answer really depends on age. Where a client is any age, eligible pension income includes periodic pension payments and successor annuitant RRIF payments on death of a spouse. Age 65 or older is required to split RRIF payments, LIF payments and certain annuity payments (usually sourced by insurance companies). RRSPs offered by mutual fund companies are generally trusteed RR- SPs which do not allow for income-splitting regardless of age. Understanding the pension income-splitting rules can mean tax savings at both the federal and provincial levels, adding value to your senior client families. Federal rules. Some differences for Quebec tax purposes 2 Splitable at any age if received due to spouse s death
v CPP/QPP - Facts & Figures CPP and QPP premiums will be paid on employment and self-employment income of up to $55,900, with the first $3,500 being exempt. The contributory period normally runs from age 8 to 70. Between employers and employees, premium amounts are 9.90% for CPP and 0.80% for QPP, with self-employed individuals paying the full amount. At retirement, assuming age 65, retirement benefits are currently $,34 per month. Disability and death benefits are also available. 2 One-time payment v Recent Changes to CPP Elimination of work cessation test Introduction of post-retirement benefit - For working pensioners; mandatory from ages 60-64, optional thereafter Change to pre-/post-65 take-up Enhanced general drop-out provision - From 5% to 7% Retirement savings reform Source: Canada Revenue Agency; current as of March 208
What should Canadians know about employer-sponsored benefits? Using the earlier analogy of reitrement planning being a 3-wheeled (tricyle) approach, many Canadians are riding bicycles and unicycles in retirement. A big reason for this is that the availability of employment pension plans (and locked-in accounts sourced by employment pension plans), a large portion of wheel #2, has, since 99, been steadily decreasing. While the majority of government employees have access to a pension plan (see red line), like private sector employees who have a much smaller availability rate (the green line), both have seen a steady decline in availability over the years. Employer-Sponsored Benefits Statistics: From 997-20, the proportion of employees covered by RPPs dropped by % Only 38% of employees participate in a RPP There is a growing disparity between workplace pension plans in the public and private sectors 2 - # of workers with a pension plan: Public 80% vs. Private 25% - Majority of pensioned employees (50.2%) are government workers Statistics Canada (204); 2 Globe and Mail (20)
What options are available to convert personal savings into a retirement income and how do you know which option(s) is best for your personal cicumstances? For years, Canadians have been advised to set aside personal savings for retirement. With the transition of baby boomers to retirement, many are looking at converting their savings to a retirement income stream. When thinking about personal savings, we often think of the accumulation phase the income earning years, as we accumulate assets for the future. But, with the aforementioned transition of baby boomers to retirement, focuses are shifting to de-cumulation drawing down personal savings in an attempt to create one s retirement paycheque. As you know, there are various options for deploying personal savings, including: -Various forms of annuities -Guaranteed minimum withdrawal benefits (GMWB) -Periodic payments from RRSPs or RRIFs -T-series distributions -Systematic withdrawal plans (SWPs), and -TFSA income *Subject to excess withdrawals Like most things in life, there are pros and cons to each option, and in many cases, a combination of the options is best. If you are looking for a guaranteed lifetime income stream, maybe an annuity or GMWB solution is best. But, if you are looking for flexible access to cash or control over investments or rates of return, maybe the annuity option is NOT the best option. If tax-efficiency or OAS clawbacks during retirement are a concern, maybe it is best to minimize LIF or RRIF income. For individuals who would like to leave an inheritance for beneficiaries, depending on any guarantee period, an annuity might not be the best fit. It is important, however, to be mindful of tax bracket thresholds and income-sensitive benefits (eg. OAS). To discuss anything further or learn about all your options, we highly recommend making an appointment with a financial advisor, as all topics pertaining to this ctopic an be challenging to navigate.
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