Category Archives: Personal finance

Can my spouse join SPP?

By Sheryl Smolkin

If both you and your spouse have individual RRSP contribution room of at least $2,500, each of you can contribute up to the annual maximum to your own Saskatchewan Pension Plan accounts. You can also each transfer $10,000 a year from individual RRSPs to your personal SPP accounts.

However, if you have sufficient RRSP room and your spouse does not, your spouse can open an SPP account to which you are the contributor. You can contribute up to $5,000/year in total ($2,500 for each of you) into the two accounts and get a tax deduction for the whole amount.

When it comes to RRSP transfers to SPP, your spouse can only make a transfer from an RRSP in his/her own name. You cannot make a $10,000 transfer from your RRSP to your partner’s spousal account.

Two major advantages of a spousal SPP account are that you can contribute double the amount each year and income split at retirement. Also, if both of you elect annuity options and one of you dies first, the surviving partner will still have a stream of income.

Also check out:

Derek Foster: Idiot Millionaire CBC Radio Saskatoon interview – August 13, 12

A pension solution for your business Saskatchewan Broker – Winter 2011

Roseman: Want to save tax? Look to SPP Moneyville.ca – March 6, 2012

Why transfer RRSP funds to SPP?

By Sheryl Smolkin

In addition to maximum regular contributions of $2,500/year, SPP members can annually transfer up to $10,000 into their SPP account from existing RRSPs, RRIFs and unlocked RPPs. In 2012, over 200 members have already transferred $1.5 million into their SPP accounts.

Since these are direct transfers between plans, there are no tax implications. As part of the transfer process, members are asked for investment instructions directing money to either the balanced fund and/or the short-term fund.

Once funds are transferred into the SPP, all of the member’s assets benefit from the plan’s low investment fees (about 1.1 per cent) and competitive returns (7.8% since inception 26 years ago).

Furthermore, contributions are creditor-protected and cannot be seized, claimed or garnisheed in any way except in the event of a court order under a marital division or Enforcement of Maintenance Order.

Both regular contributions (up to $2,500/year) and additional amounts transferred into the SPP are locked-in and are used to provide you with a pension or lump sum at retirement.

If you have money in existing RRSPs or unlocked RPPs, consider transferring up to $10,000 each calendar year to your SPP account. It’s a cost-effective, stress-free way to enhance the benefit you receive when you retire from the plan.

SPP members may begin receiving benefits from the Plan any time after age 55 and must be retired from the Plan by the end of the year in which they reach 71. At SPP, “retirement” simply means you are receiving pension payments. You can still be employed and receive pension from SPP.

You can use this form to an initiate a transfer of funds to SPP.

 

Also see:

Backgrounder – Saskatchewan Pension Plan and Income Tax Act Changes

Roseman: Want to save tax? Look to Saskatchewan

MoneyTalk interview with Derek Foster : February 13, 2012

What if I move away from Saskatchewan?

By Sheryl Smolkin

If you’re age 18 to 71 years of age, you can join the Saskatchewan Pension Plan. Participation is not restricted by where you live or membership in other plans. However, you must have available Registered Retirement Savings Plan (RRSP) room to contribute to SPP.

As a result, you can continue to contribute to SPP even if you leave the province. As long as you live in Canada, your SPP contributions will be tax deductible and grow tax free within the plan. Any payments out of the plan after age 55 will be taxable income.

Because SPP participation is not restricted to provincial residents, it is a particularly good retirement savings vehicle for organizations with employees in more than one province. Whether you are transferred from one end of the country to another or move to take a new job, you can continue contributing to the plan.

If you move outside of Canada before or after retirement, the tax treatment of SPP contributions and withdrawals may differ. You should seek tax advice from a lawyer or an accountant in the jurisdiction where you plan to move, either when you are still working or you retire.

Also read:
Who can join SPP
SPP member guide

Understanding SPP annuities

By Sheryl Smolkin

For many years you have been focused on saving and investing for retirement by maximizing contributions to the Saskatchewan Pension Plan (SPP) and other retirement savings vehicles.  As you plan for retirement, you need to consider the best way to shift from accumulation mode to the decumulation phase of retirement savings.

You may choose an annuity from SPP and receive a pension for the rest of your life, transfer the funds to a locked-in account with a financial institution, or choose a combination of the annuity and transfer options. If your account balance is small you may be able to have your account paid to you in a lump sum instead of receiving monthly payments.

SPP members may begin receiving benefits from the Plan any time after age 55 and must be retired from the Plan by the end of the year in which they reach 71. At SPP, “retirement” simply means you are receiving pension payments. You can still be employed and receive a pension from SPP.

SPP annuity options

All SPP annuities pay you a monthly pension for your lifetime. The amount of your monthly pension is based on your account balance, your age at retirement, interest and annuity rates in effect and the age of your joint survivor (where applicable).  SPP annuity income qualifies for the pension income credit and for pension income splitting. Each annuity option treats death benefits differently.

If you decide to purchase an annuity, your individual account balance is transferred from the SPP contribution fund to the SPP annuity fund and a pension contract is established. The annuity fund holds investments in high quality long-term bonds.

Here are the kinds of annuities offered by SPP:

Life only annuity
This annuity provides you with the largest possible monthly pension for your life. When you die all payments stop.

Refund life annuity
This annuity pays you a monthly pension for the rest of your life. When you die any balance remaining in your account is paid to your beneficiary in a lump sum. If you name your spouse as beneficiary of your account, CRA allows death benefits to be transferred, tax-deferred, directly to his or her SPP account or to an RRSP, RRIF or guaranteed Life Annuity. Tax-deferred transfer options are also available if the beneficiary is a financially dependent child or grandchild.

Joint survivor annuity
The joint survivor annuity also pays you a monthly pension for the rest of your life. If you choose this option you must name your spouse as survivor. When you die, monthly payments continue to your spouse. If your spouse predeceases you, the payments stop with your death. Benefits are based on your age and the age of your joint survivor.

Pros and cons of SPP annuities

When you opt for an annuity which pays a fixed monthly benefit, you are buying peace of mind. You know how much you will receive and you can budget accordingly.  Because you purchase the annuity directly from SPP, there are no commissions or referral fees and you can be sure you are getting competitive rates.

Essentially, SPP assumes the risk associated with the investment and you receive pension payments for your life time.

With interest rates at historic lows, you may be reluctant to opt for an annuity. However, it is important to keep in mind that your benefit reflects an integrated blend of cash flows:

  • Interest on your money.
  • A portion of your contributions back.

Example: August 2012/Joint survivor is the same age as retiree/lump sum of $100,000*

Age 55 Age 60 Age 65 Age 70
Life only annuity $451 $494 $554 $637
Refund annuity $433 $464 $505 $561
Joint survivor annuity 100% $406 $434 $473 $529

* Your annuity benefits will reflect your own age, interest rates and the balance in your contribution account.

If you are considering retiring from SPP, call the toll-free line
(1-800-667-7153) for an estimate of your monthly pension based on the various annuity options available and your personal information.

How do I know my money is in good hands?

By Sheryl Smolkin

When you save for retirement, the last thing you should have to worry about is whether your money is in good hands. With the Saskatchewan Pension Plan you can be confident that your money is managed by professional investment managers based on a written statement of specific quality, quantity and benchmark standards.

A Board of Trustees appointed by the Saskatchewan government administers the Plan and acts as Trustee of the Funds. The Board has a fiduciary responsibility to ensure the investments are managed prudently. Responsibility for safekeeping of the assets, income collection, settlement of investment transactions, and accounting for the investment transactions has been delegated to a trust company.

No one can guarantee how much your investments will earn over time, but SPP’s Statement of Investment Policies and Goals for the investment and administration of plan assets is based on a “prudent person portfolio approach.”

Non-retired members can invest their assets in either the balanced fund or the short-term fund. These two funds are collectively known as the Contribution Fund.  Assets of retired members are held in the Annuity Fund.

The purpose of the SPP Balanced Fund is to accumulate member assets and invest them in a prudent, risk-controlled manner for long-term growth. The short-term fund is designed to preserve capital and provide a stable cash flow.

In order to achieve the long-term investment goals, the balanced fund invests in assets that may have uncertain returns, such as Canadian equities, foreign equities and bonds. However, the Board attempts to reduce the overall level of risk by diversifying the asset classes, diversifying within each individual asset class and diversifying by manager style.

Risk is also addressed through quality, quantity and diversification guidelines and by retaining an Investment Consultant who monitors investment performance and reports to the Board on Investment Manager related issues that may have an impact on performance.

As a further risk control measure, management reviews compliance on a monthly basis of each of the managers with the quality and quantity guidelines contained in this policy. Finally, investment managers provide quarterly reports to the Board on compliance with the investment policy throughout the reporting period.

The short-term fund eliminates most risks by investing solely in a high quality money market portfolio. The remaining risks are accepted as the costs of providing a high level of capital preservation.

You can review SPP’s balanced fund, short-term fund and annuity fund investments at December 31, 2011 on the Plan’s website.

SPP allocates 100% of the market rate of return, less operating expenses of about 1% to members monthly. With all of the checks and balances in place, you can be confident that your money is in good hands, and will be there to help fund your retirement when you need it.

Also read:

Is my money safe in a company pension plan?

Four key questions about the safety of your pension

Is the money in my RRSP safe?

Pension Plan vs. RRSP

By Sheryl Smolkin

Although you require RRSP contribution room to make contributions to the Saskatchewan Pension Plan (SPP), there are some fundamental differences between this pension plan and an RRSP.

One key distinction is that funds you contribute to the SPP are locked-in until you choose to retire from the plan between ages 55 to 71. This means that the money you need to supplement government benefits and other savings will be there when you need it for retirement.

In contrast, your RRSP accumulated contributions can be withdrawn at any time, subject to payment of income tax on withdrawals in the year of receipt. In addition, there are several programs that allow you to borrow and then repay RRSP funds including the Home Buyer’s Plan (15 year repayment), and the Life Long Learning Plan (10 year repayment).

However, by withdrawing RRSP funds or borrowing from your RRSP, you reduce long term growth potential in your account. The tax-free savings account (TFSA) may be better suited as an emergency fund or to save for shorter-term goals, as contribution room is not lost when withdrawals are made, and funds can be replaced in the next year.

The SPP also gives you flexible options for using your money when you retire from the plan. You may choose an annuity from SPP and be assured of receiving a pension for the rest of your life; transfer the funds to a locked-in account or prescribed RRIF with a financial institution; or choose a combination of the annuity and transfer options.

If you choose to allocate all or part of your SPP savings to an annuity option, funds stay invested with SPP; there is no transfer fee; and, the SPP assumes the investment risk and the obligation to pay a pension for your lifetime. RRSP accounts must be transferred to a life income fund before an annuity purchase can be made from an insurance company.

Saving in the SPP or a registered retirement savings plan should not be an either/or proposition. The SPP is an ideal basic building block for your retirement savings. And if you have more contribution room, you can still save and invest additional money in an individual or group RRSP.

Also read:

Pensions & RRSPs

Retirement Planning: 10 common mistakes

Griffiths: 6 reasons to avoid RRSP loans

Planning your pension

Want to save tax? Look to Saskatchewan

Separating retirement myths from reality

By Sheryl Smolkin

In the first two months of every year, oceans of words are written trying to help people understand why retirement savings is important and how best to grow their money.

However, a recent TD Poll reveals Saskatchewan and Manitoba residents still have a variety of misconceptions about their retirement finances, from when they should start saving to the amount they will need.

Here are four retirement savings myths that continue to proliferate in spite of ongoing efforts by financial institutions, governments and the media to enhance the financial literacy of Canadians.

Myth 1: You should focus on eliminating debt before saving for your retirement.

The majority of survey participants (63%) in Manitoba and Saskatchewan think they should focus on eliminating debt before saving for retirement, and 59% feel they should never retire with any debt.

If you have a mortgage, you have debt. With most mortgages amortized over 25 years, if you wait to start saving until your mortgage is paid off, you will never accumulate enough to retire. It’s important to pay down as much debt as possible before retiring, but it’s also essential to strike a balance between reducing debt and saving for retirement.

Myth 2: In an economic downturn it’s safer to sell your investments and only put your money in guaranteed investments.

Those in Manitoba and Saskatchewan are the least likely to believe that putting money only in guaranteed investments is the safest strategy durng an economic downturn (32% vs. 42% nationally).

Consumer prices rose 2.3% in the 12 months to December 2011, following a 2.9% increase in November. GICs may be safe, but at best they are currently earning about 1.5 per cent – much less than inflation.

An advisor can help you determine the right asset allocation for your portfolio, which will optimize potential returns without exposure to inappropriate levels of risk.

Once you have a plan, stick with it. Trying to time the market doesn’t work, even for the experts. If you sell everything and move to fixed income investments when markets are down, you will not participate in the gains when the inevitable recovery occurs.

Myth 3: The older you get, the less money you spend/need for day-to-day expenses.

With more than half of Manitoba and Saskatchewan residents believing this to be true, they are the most likely in the country to feel that your expenses will decrease as you age (55% vs. 46% nationally).

But if you plan to travel, continue membership in pricey clubs and eat in expensive restaurants, your cost of living in retirement could be more rather than less.

Also, don’t forget to take into account everyday expenses such as dental and health care, or unforeseen expenses such as accidents or home repair.

Work with an advisor to estimate what your expenses will be in retirement, and to ensure that you are saving enough now to pay for these future expenses when you no longer have a pay cheque.

Myth 4: You don’t need to have money in the stock market to grow your retirement nest egg.

Sixty-four percent of people in Manitoba and Saskatchewan do not believe that investing in the stock market is required to establish a financially-secure retirement.

When it comes to retirement savings, it’s important to establish a good balance and have a variety of investments and savings products, including equities, bonds, and savings vehicles such as SPP, RRSPs or TFSAs.

Your portfolio should also contain a mix of conservative and more aggressive investments, depending on the number of years you have until retirement and your comfort level, which will help you maximize your retirement savings.

Saving money is as easy or as hard as you make it. As fellow moneyville blogger Krystal Yee recently wrote in RRSP baby steps: The $12.50 solution, you don’t have to start by saving hundreds of dollars from every pay cheque. Find a number that works for you – even if it’s only $25 bi-weekly – and have it automatically deducted from your bank account as soon as you get paid.

Also read:

How worried should you be about retirement?

Do you really need an RRSP?

Sheryl Smolkin is a Toronto lawyer, writer and editor. She can be contacted through her website or you can follow her on Twitter @SherylSmolkin.

How to save tax dollars

By Sheryl Smolkin

We all know we ought to maximize Saskatchewan Pension Plan and other retirement savings plan contributions so we can retire comfortably sooner rather than later.

But the fact that your SPP contribution is deducted directly from your income for tax purposes and lowers the total income taxes you pay not only makes saving easier – it makes you feel like you’re getting a break!

You must have available RRSP room to make an SPP contribution. SPP contributions should be reported on Schedule 7 of your income tax form and claimed on line 208. Both your application and your contribution must be received by SPP before a tax receipt will be issued. SPP contributions will also be taken into account in determining RRSP over-contributions.

Spousal contributions are also permitted and if you have available RRSP room, you may contribute and receive a tax deduction for both your personal account and your spouse’s account.

Reduce taxes at source

Although you may look forward to getting money back after you file your income tax return in April, let’s face it — where possible, the best strategy is to avoid paying unnecessary taxes in the first place.

If you contribute to SPP by payroll deductions your employer can reduce the income tax you pay at source. But if you make regular monthly contributions which have not been automatically deducted by your employer, a letter of authority from a tax services officer must be provided in order to reduce income taxes deducted.

To get this letter you have to complete a Form T1213 Request to Reduce Tax Deductions at Source and provide documentation showing you are making regular SPP contributions to support the request for a tax deduction at source. It may take four to eight weeks for the Canada Revenue Agency to process the request.

Tax treatment of benefits

When your spouse has been named as beneficiary, death benefits from your account can be transferred directly to his/her SPP account or to an RRSP, RRIF, or guaranteed life annuity. Tax-deferred transfer options are also available if the beneficiary is a financially dependent child or grandchild.

All annuity payments from SPP are taxable in the year received and are eligible for the $2,000 pension income credit and for pension income splitting. Each year you will receive a T4A for the benefits that you have received in that year. Withholding tax is determined using a schedule prescribed by Canada Revenue Agency (CRA).

Your SPP account is also tax sheltered. You may continue contributing to your account until the end of the year in which you celebrate your 71st birthday or until you begin receiving a pension from SPP, whichever is earlier. You can continue contributing to the Plan if you are receiving SPP survivor’s benefits.

Key SPP tax benefits

  • Personal tax deduction available.
  • Spousal tax deduction available.
  • Contributions and earnings are sheltered from tax until received as income.
  • SPP annuity income is eligible for the pension income credit and for pension income splitting.

  

Also read:

RRSPs and related plans

RRSP myths are just that

Why you should never borrow for RRSPs

Deductions at tax time make RRSPs popular

Sheryl Smolkin is a Toronto lawyer, writer and editor. She blogs for the Toronto star on moneyville.ca and can be contacted through her website. You can also follow her on Twitter @SherylSmolkin.

Pay yourself first

By Sheryl Smolkin

Saving for retirement is hard. You fully intend to put away a percentage of every paycheque but mortgage payments, car payments and new shoes for your children get in the way. When you have a few dollars in your pocket after paying the bills, travel and the latest tech toy are powerful magnets.

But you can make saving much easier, by adopting one simple financial planning principle: “Pay yourself first.”

“Pay yourself first” as a cornerstone of investment philosophy was popularized in this country by David Chilton, the renowned author of The Wealthy Barber. Simply put, it means that before you pay your bills, before you buy your groceries, before you do anything else, set aside a portion of your income to save. The first bill you pay each month should be to yourself.

Decide on the purposes for which you want to save and the amount you want to save each pay period. Then arrange for automatic withdrawals by your bank or other financial institution.

Here are three reasons why paying yourself first makes sense:

  1. You are making savings a priority. You are telling yourself that your future is just as important as all of the current expenses you are responsible for.
  2. You are developing sound financial habits. Most people spend money in the following order: bills, fun, savings. By putting savings first, you put the money aside before you find reasons to spend it.
  3. You are building a cash buffer. Regular cash contributions are an excellent way to build a retirement nest egg. You can also allocate a portion of your savings for an emergency fund or to purchase a home. Paying yourself first gives you the freedom to choose.

You can even use the tax system to “Pay yourself first” and get a raise. If you are saving regularly in the Saskatchewan Pension Plan or a registered retirement savings plan, you can complete a T1213 form and request permission for your employer to deduct a lower amount of taxes at source,

By reducing your withholdings at source, you are paying yourself and not the Canada Revenue Agency first, and increasing your net take home pay. You are effectively giving yourself a raise all year long, not just once at tax time.

You can contribute up to $2,500/year to the Saskatchewan Pension Plan and contribution options include directly contributing from your bank account on a pre-authorized contribution schedule.

Developing the “Pay yourself first” habit can help you build up a substantial retirement nest egg. For example, if you deposit $2,500/year in the SPP and earn five percent over a 40 year career (age 25 to 65) you will have a lump sum of about $317,000 in your account.

For additional retirement or other savings, you can also direct your financial institution to transfer regular amounts to savings vehicles like tax free savings accounts and registered retirement savings plans.

Also read:

The Wealthy Barber

The Automatic Millionaire

The Richest Man in Babylon

Pay yourself first

Pay yourself first?

Pay yourself first

Sheryl Smolkin is a Toronto lawyer, writer and editor. She blogs for the Toronto star on moneyville.ca and can be contacted through her website. You can also follow her on Twitter @SherylSmolkin.

Millionaire teacher’s first rule of Wealth

By Sheryl Smolkin

High School English teacher Andrew Hallam started investing when he was 19. In an excerpt from his book Millionaire Teacher published on moneyville.ca, Hallam talks about the benefits of starting to save early and the power of compound interest:

“…Buried in the dull pages of most school math books is something that’s actually useful: the magical premise of compound interest.

Warren Buffett applied it to become a billionaire. More importantly, so can you and I’ll show you how.

Starting early is the greatest gift you can give yourself. If you start early and if you invest efficiently (in a manner that I’ll explain in this book) you can build a fortune over time, while spending just 60 minutes a year monitoring your investments.”

Read more