Pension Adjustment and Retirement Options

Pension Adjustment (PA)

• A pension adjustment reflects the integration between RPP contributions and RRSP contributions
• A taxpayer's PA represents the value of benefits earned in RPP or DPSP
• A PA decreases RRSP contribution room
• Defined Contribution Plan
  • PA = (Employer + Employee contributions) x Pensionable Earnings
• Defined Benefit Plan
  • PA for defined benefit plan = (9 x benefit entitlement) – $600

Pension Adjustment Reversal (PAR)

• A PAR increases the individual's RRSP contribution room
• PAR occurs when a registered pension plan member does not acquire a vested interest in a pension plan

Options at Retirement

• Life Income with a Guarantee Period
  • Provides pension during the lifetime with a guaranteed minimum payment period
  • If the plan member dies before the guarantee period ends, payments continue to a beneficiary for the remaining period
• Joint and Survivor
  • Provides a lifetime pension to the annuitant
  • Continued payments to the surviving spouse after the annuitant's death
  • The amount of the surviving spouse's pension depends on the selected option (e.g., 100% or 60% of the original pension)

Defined Contribution Plans

• Contributions

  • Contributions are invested and the sum of contributions + investment earnings is used to purchase retirement income
  • The plan member has a selection of investment options (e.g., mutual funds, GIC’s, and cash accounts)
  • Minimum annual contributions are required from employers (at least 1%)
  • Maximum Contributions
    • The Act requires a minimum annual contribution of 1% from the employer.
    • Maximum contribution is the lesser of:
      • 18% of earnings
      • $27,230 (2020 maximum RRSP limit)

• Benefit Entitlement

  • Refers to the accrued benefits earned by the individual
  • Benefit entitlement is communicated in various situations (e.g., termination of employment, retirement, death, plan termination)

• Benefit Calculation

  • There is no restriction on the maximum pension that may arise from a defined contribution pension plan

Retirement

• Normal Retirement
  • Most pension plans have a normal retirement age of 65
  • Plan members are offered various benefit options at normal retirement.
  • Spouses can opt out of the annuitant's pension with written consent.
• Normal Retirement Pension
  • Typically an annuity type of payment (life income pension, life income with a guarantee period, joint and survivor, joint and survivor option with a guarantee period).

Life Income Pension

• Provides retirement income to the retiree for their lifetime, ending at their death

Types of Pension Plans

• Two main types of pension plans in Canada: public and private.
• Public plans include Canada Pension Plan (CPP), Old Age Security (OAS), and provincial/territorial plans.
• Private plans are called Registered Pension Plans (RPPs) and include defined benefit (DB) and defined contribution (DC) pension plans.

Parties to a Pension Plan

• Plan Member: the person the plan is established for.
• Plan Sponsor: the organization that sets up and maintains the plan; for RPPs, this is typically the employer.
• Plan Administrator/Trustee: responsible for managing the plan.

Regulations

• Registered pension plans are governed by rules under the Income Tax Act, consistent across Canada.
• Federal Pension Benefits Standards Act oversees plans for specific federal works, undertakings, and businesses.
• Provincial regulations govern the operation of most pension plans across Canada.

Regulators

• Federal and provincial legislation aims to protect the rights of plan members and dependents.
• Canadian Association of Pension Supervisory Authorities (CAPSA) facilitates effective pension regulation in Canada.

Pensionable Service

• Refers to the plan member's working period used to calculate their defined benefit pension.
• Plan design determines the formula for calculating pensionable service.
• Regulations establish minimum and maximum boundaries for service calculations.

Eligibility

• Determined by the plan design, but waiting periods cannot exceed 24 months for full-time employees in most jurisdictions.
• Participation requirements can vary for different employee groups, but cannot discriminate based on age or sex.
• Eligibility applies to termination of employment, retirement, death, and plan termination.

Defined Benefit (DB) Pension Plans

• Provide pension benefits based on a defined formula, with the benefit known before retirement.
• Less common today due to declining popularity among employers.
• Formula is defined in plan documents, giving members a good estimation of expected retirement income.

Types of Benefit Formulas

• Final Earnings or Best Average: Benefit is a percentage of final earnings multiplied by years of participation.
• Career Average: Utilizes pensionable earnings for each year of participation.
• Flat Benefit: Provides a fixed amount per year of service.
• Final Earnings Formula: Based on average final earnings over a designated period (usually 3-5 years).
• Best Average Earnings Formula: Based on the best consecutive earnings over a period (typically 3-5 years).
• Formula: Earnings x Unit Percentage x Years.
• Example: For a 1.5% unit percentage and 15 years of participation, with final earnings of 70,000,theannualpensionwouldbe70,000, the annual pension would be 70,000,theannualpensionwouldbe15,750.

Defined Benefit Pension Plan Considerations

• Final Earnings or Best Average: Allows for pension income closely aligned to pre-retirement salary.
• Best Average: Maximizes pension by including the best income years.
• Final Average: Can be impacted by salary reductions during pre-retirement years.
• Employer's Perspective: Unknown costs due to uncertain future earnings, which can represent a significant liability.
• Career Average: Costs are easier to predict for the employer.
• Formula: Total Earnings x Unit Percentage.

Registered Retirement Income Funds (RRIFs)

• Designed to provide annuitants with a future income stream, with annual income reporting required on tax returns.
• Offer tax deferral opportunities, with assets accumulating tax-free within RRSPs and RRIFs.
• Income payout phase marks the conversion of accumulated assets into perpetual income for the annuitant or spouse.

Establishing RRIFs

• Funds are transferred from registered vehicles like RRSPs, other RRIFs, or registered pension plans.
• Many plan owners convert RRSP savings into RRIFs when their RRSP matures to address income requirements.

Minimum Withdrawal Calculation

• Annuitant can choose to base annual minimum withdrawals on either their own or their spouse's age.
• Calculation factors: market value of plan assets as of January 1 and the annuitant's age as of January 1 (or spouse's if elected).
• If the annuitant is 70 or younger: Minimum payment = (Market value of plan assets on January 1) ÷ (90 – age).
• If the annuitant is 71 or older: Minimum payment = (Market value of plan assets on January 1) x (CRA age factor).
• Example: A RRIF with a market value of 100,000andanannuitantaged65wouldhaveaminimumwithdrawalof100,000 and an annuitant aged 65 would have a minimum withdrawal of 100,000andanannuitantaged65wouldhaveaminimumwithdrawalof4,444.44.

RRIF Withdrawals

• Minimum withdrawals required annually, with no withholding tax for withdrawals based on the minimum amount.
• Payments must be regular, and individuals can withdraw as much as they wish as long as the minimum income requirement is met.

RRIF Income Tax Implications

• All payments from a regular RRIF are fully taxable as income to the recipient.
• Minimum payments do not attract automatic withholding tax.

Withholding Taxes on RRIF Withdrawals (2020)

• Withdrawal Amount | All Provinces except Quebec | Quebec
• ------------------ | -------------------------- | --------
• Up to $5,000 | 10% | 21%
• 5,001−5,001 - 5,001−15,000 | 20% | 28%
• Over $15,000 | 30% | 31%

Life Income Funds (LIFs)

• Retirement plans for locked-in funds originating from registered pension plans.
• Federal or provincial pension legislation applies based on the employment province.
• Pension assets are typically locked in, requiring financial institutions to register LIF products with the CRA and follow specific regulations.
• Two primary differences between LIFs and RRIFs:
  • LIFs have minimum and maximum withdrawal thresholds.
  • LIFs require a specific withdrawal schedule based on the annuitant's age and a chosen withdrawal option.

Key differences Between RRSPs, RRIFs, and LIFs

• RRSPs: Used for pre-retirement savings and contributions are tax deductible; withdrawals upon retirement are taxed as income.
• RRIFs: Conversion of RRSP savings at retirement to create a source of income; withdrawals are taxable as income.
• LIFs: Retirement plans for locked-in funds from pension plans; withdrawals follow a specific schedule and are taxed as income.

This quiz covers the details of Pension Adjustments (PA) and Pension Adjustment Reversals (PAR), along with the options available at retirement. Learn how PA affects RRSP contribution room and the different pension plans including Life Income and Joint and Survivor options.