Building your Financial
Success
With Alain Aube
Retirement Planning and RRSP's
Pension plans
pave the road to retirement and beyond - when you know what's best for
you
Whether your road to retirement is long or short, you want to be certain
of one thing: that you arrive at the right destination with the plenty
of money to enjoy your stay. The best way to do that is to carefully map
out a financial plan aimed at achieving the retirement of your dreams. A
plan that avoids costly detours and financially devastating dead ends. A
plan that will keep you on track toward financial security whenever you
decide to trade the workaday world for other pursuits.
Pension plans usually play a key role in a retirement strategy. But
different plans have different characteristics, and you may need to make
decisions along the way that will have an impact on the taxes you pay
and the income you receive after retirement. So here's some basic
pension plan information that could pay off for you down the road.
Government pension plans: If you've lived in Canada and contributed to
the Canada Pension Plan (CPP) or the Quebec Pension Plan (QPP), you'll
be entitled to receive benefits. You can choose to start receiving them
any time between ages 60 and 70, but benefits are reduced by a half of
one per cent for each month you receive them prior to age 65. On the
other hand, they'll increase at the same rate for every month you delay
receiving them after age 65. You must be 'substantially retired' to
collect benefits before age 65.
You and your spouse are allowed to split CPP/QPP benefits - and, if
you're in different tax brackets, splitting the benefits can help
equalize income and reduce the total amount of tax you'll pay together
as a couple.
Company pension plans and locked-in retirement accounts: Over 85 per
cent of all Canadians who are enrolled in an employer sponsored pension
plan belong to a plan known as a Defined Benefit (DB) Plan. As the name
suggests, DB plans 'define' the pension benefits payable upon retirement
based on a formula that reflects your earnings and years of service.
Some DB plans contain a Flexible Benefit (or 'flex') feature that gives
members the option of making additional voluntary contributions to the
plan. The value of your flex account can be used at retirement to
purchase ancillary benefits such as a cost of living increase or bridge
payments, which are payments that provide a higher income prior to
receipt of CPP and Old Age Security (OAS) benefits. Flex plan benefits
may also provide you with an unreduced pension should you decide on
early retirement.
Taking advantage of a flex plan could be beneficial if you already
maximize your RSP contributions and have additional monies available for
investment. Flex contributions are usually tax-deductible, but do not
affect your RSP contribution room.
In contrast to Defined Benefit Plans, Defined Contribution (DC) Plans
combine the member's and employer's contributions, and the plan's
investment earnings, to purchase either a life annuity contract or to a
locked-in plan such as a Locked-in Retirement Account (LIRA), a Life
Income Fund (LIF) or, in some provinces, a Locked-in Retirement Income
Fund (LRIF).
LIFs are similar to Retirement Income Funds (RIFs) in that you are
required to withdraw a minimum amount each year after retirement - but
the withdrawals are also capped by pension legislation. This establishes
a 'band' or range of income you can withdraw each year which intended to
ensure the LIF is not prematurely depleted. You decide what amount
within that range will meet your needs and, in most jurisdictions, when
you reach age 80, you must buy a life annuity with any money remaining
in the LIF. LRIFs are similar to LIFs, but needn't be converted to an
annuity at age 80.
Many company pension plans allow you to transfer your accumulated
pension benefits into a LIRA before ultimately moving them into a LIF/LRIF,
but be aware you may forfeit other retirement benefits by doing so.
Still, for some people, the ability to control how their retirement
savings are managed makes this an attractive option.
Will you reach your retirement destination with enough financial fuel in
your tank to keep on motoring happily through the years? Talk to your
financial advisor to ensure you're taking full advantage of every
opportunity to make your retirement as fulfilling as it can be.
