Tag Archives: DPSP

Even those with workplace retirement savings plan coverage still worry about retirement: Aon research

Recent research conducted for Aon has found that Canadian workers in capital accumulation plans (CAPs), such as defined contribution (DC ) pension plans or group RRSPs, while confident about these plans and their own finances, “find it hard to save for retirement and are worried about having enough money to retire.”

The global actuarial and HR firm’s report, Global DC and Financial Wellbeing Employee Survey, also found that “fewer than half” of those surveyed have a particular goal for retirement savings, and that “depending on other sources of income, many find their current plan contribution levels are inadequate to ensure their total income needs in retirement,” according to an Aon release.

Among the other findings of the report:

  • Of the 1,003 respondents, only 27 per cent saw their financial condition as poor
  • Almost half of those surveyed say outstanding debts are preventing them from saving for retirement
  • Two of five who are in employer-matching plans (where the employer matches the contributions made by the employee) are not taking full advantage of the match
  • Of those who expect to fully retire from work, two-thirds expect to do so by age 66; 30 per cent expect to keep working forever in some capacity.

Save with SPP reached out to one of the authors of the research, Rosalind Gilbert, Associate Partner in Aon’s Vancouver office, to get a little more detail on what she made of the key findings of the research. 

Do you have a sense of what people think adequate contributions would be – maybe a higher percentage of their earnings?

“I don’t believe most respondents actually know what is ‘adequate’ for them from a savings rate perspective.  The responses are more reflective of their fears that that they don’t have enough saved to provide themselves a secure retirement.  Some may be relating this to the results of an online modeller of some kind, or feedback from financial advisors.

“I also think that many employees don’t have a clear picture of the annual income they will be receiving from Canada Pension Plan/Old Age Security to carve that out from the income they need to produce through workplace savings.  Some of this comes back to not having a retirement plan in terms of what age they might retire and, separately, what age they might start their CPP and OAS (since both of those drive the level of those benefits quite significantly).”

Is debt, for things like mortgages and credit cards, restricting savings, in that after paying off debt there is no money left for retirement savings?

“We were surprised to see the number of individuals who cited credit card debt as a barrier to saving for retirement. Some of this is the servicing (interest) cost, which is directly related to the amount of debt (and which will increase materially if interest rates do start to rise, which many are predicting).

“I think that the cost of living, primarily the cost of housing and daycare, is currently quite high for many individuals (particularly in certain areas like Vancouver), and that, combined with very high levels of student loans, means younger employees are just not able to put any additional money away for retirement.  There is also a growing generation of employees who are managing child care and parent care at the same time which is further impeding retirement savings.”

We keep hearing that workplace pensions are not common, but it appears from your research that participation rates are high (when a plan is available).

“This survey only included employees who were participating in their employers’ workplace retirement savings program.  So you are correct that industry stats show that overall coverage of Canadian employees by workplace savings programs is low, but our survey showed that where workplace savings programs are available, participation rates are high.”

What could be done to improve retirement savings outcomes – you mention many don’t take advantage of retirement programs and matching; any other areas for improvement?

“In Canada, DC pension plans and other CAPs are not as mature as they are in other countries such as the UK and US.  That said, we are now seeing the first generation of Canadians retiring with a full career of DC (rather than DB) retirement savings.  Appropriately, there has been a definite swing towards focusing on decumulation (outcomes) versus accumulation in such CAPs.

“From service providers like the insurance companies that do recordkeeping for workplace CAPs, this includes enhanced tools supporting financial literacy and retirement and financial planning.  Also, many firms who provide consulting services to employers for their workplace plans encourage those employers to focus on educating members and encouraging them to use the available tools and resources.

“However, if members are required to transfer funds out of group employer programs into individual savings and income vehicles (with associated higher fees and no risk pooling) when they leave employment, they will see material erosion of their retirement savings. Variable benefit income arrangements (LIF and RRIF type plans) within registered DC plans are able to be provided in most jurisdictions in Canada, but there are still many DC plans which still do not offer these.

“It is more difficult to provide variable benefits when the base plan is a group RRSP or RRSP/deferred profit sharing plan (DPSP) combination, but the insurance company recordkeepers all offer group programs which members can transition into after retirement to facilitate variable lifetime benefits.  The most recent Federal Budget was really encouraging with its announcement of legislation to support the availability of Advanced Life Deferred Annuities (ALDAs) and Variable Pay Life Annuities (VPLAs) from certain types of capital accumulation plans.

“There is still more work to be done to implement these and to ensure that they are more broadly available and affordable, but it is a definite step in the right direction.  A key benefit of the VPLAs is the pooling of mortality risk while maintaining low fees and professionally managed investment options within a group plan.  The cost to an individual of paying retail fees and managing investments and their own longevity risk can have a crippling impact on that member’s ultimate retirement income.”

We thank Rosalind Gilbert for taking the time to connect with us.

If you don’t have access to a workplace pension plan, or do but want to contribute more towards your retirement, the Saskatchewan Pension Plan may be of interest. It’s a voluntary pension plan. You decide how much to contribute (up to $6,200 per year), and your contributions are then invested for your retirement. When it’s time to turn savings into income, SPP offers a variety of annuity options that can turn your savings into a lifetime income stream.

Written by Martin Biefer
Martin Biefer is Senior Pension Writer at Avery & Kerr Communications in Nepean, Ontario. A veteran reporter, editor and pension communicator, he’s now a freelancer. Interests include golf, line dancing and classic rock. He and his wife live with their Shelties, Duncan and Phoebe, and cat, Toobins. You can follow him on Twitter – his handle is @AveryKerr22

Pension-income splitting rules can reduce total tax bill

By Sheryl Smolkin

I retired from my corporate job with a defined benefit pension before I turned 55 and I opted to begin receiving my CPP at age 60. And by starting my own business as a workplace journalist I also created another significant income stream.

In contrast, when my husband retired at age 65 he did not have a pension and he elected to defer receipt of CPP and OAS for a year. He also decided not to convert his RRSP into a RRIF until he is required to do so at age 71. Therefore, other than withdrawing funds from our unregistered investment account, he had no source of income.  As a result, when it came to filing subsequent income tax returns, the disparity in our income made us ideal candidates to benefit from pension-income splitting which has been available since 2007.

The way it works is that if you are receiving income that qualifies for the pension income tax credit you’ll be able to allocate up to half of that income to your spouse or common-law partner (and vice versa) each year. You don’t actually have to write a cheque because pension income-splitting is merely a paper transaction done via your tax return.

The type of pension income that qualifies for the pension income tax credit of up to $2.000/year and that is eligible for pension splitting differs depending on whether you were 65 or older in the year.

  • If you were under 65 as of December 31, 2016, “qualifying pension income” includes life annuity payments out of a defined benefit or defined contribution pension plan and certain payments received as a result of the death of your spouse or common-law partner.
  • If you were 65 or older in 2016, other defined payments such as lifetime annuity payments out of your RRSP, DPSP or RRIF also qualify for the pension credit. Qualifying pension income doesn’t include CPP, OAS or GIS payments.
  • It is worthwhile noting that pension payments from SPP qualify for the pension income tax credit.

The extent to which pension income-splitting will be beneficial will depend on the marginal tax bracket of you and your spouse or common-law partner, as well as the amount of qualifying income that can be split. In many cases, the optimal allocation will be less than the allowable 50% maximum.

If you opt to pension split, a special election form (Form T1032) must be signed by the parties affected and filed with the CRA. If you file your return electronically, you should keep the election form on file in case the CRA asks for it. Another result of pension splitting is that the income tax withheld from your pension income will be reported on your spouse or common-law partner’s return, proportional to the amount of income being split.

Pension income splitting may also reduce the Old Age Security claw back while transferring income to your spouse who is taxed at a lower tax rate. In addition, your spouse can access the pension income credit of up to $2,000 for federal tax purposes and $1,000 for BC tax purposes, which would otherwise be unavailable without pension income.

The pension income splitting rules do not make spousal RRSPs obsolete, since spousal plans still have income splitting benefits for the years before you turn 65 or if you have not yet converted your RRSP to a RRIF or annuity. In addition, taking advantage of spousal RRSPs can increase your potential for withdrawals under the Home Buyers’ Plan and the Lifelong Learning Plan.

In 2014 and 2015 the Family Tax Cut credit provided a version of income splitting that allowed an individual to notionally transfer up to $50,000 of income to his or her lower-income spouse or partner, provided they have a child who was under 18 at the end of the year. The credit was capped at $2,000 annually. However, that form of income-splitting was abolished by the new Liberal government for 2016.

Other permitted forms of income splitting with family members are described here.