Tag Archives: RRSP

8 reasons to join your company pension plan

By Sheryl Smolkin

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One of the best ways to ensure you retire with the pile of money you need to live on is to join your company pension plan. The Saskatchewan Pension Plan offers individual and business plans for employers to use as part of their employee compensation plans.

Since maximum annual SPP contributions are $2,500 per year, some participating employers also offer group registered retirement savings plans or defined contribution pension plans for RRSP contributions over the maximum SPP limit.

Here’s why saving for retirement at work can help you retire sooner with more money:

  1. Employer matching: Employers generally make some kind of contributions on behalf of members. SPP offers several forms of matching options in their business plans:
  • Dollar for dollar match: For every $1 an employee contributes, the employer contributes $1 up to the $2,500 maximum.
  • Annual match: A set amount, for example $500 per year if the employee contributes a minimum of the same amount.
  • A start-up plan where the employer contributes a one-time start up amount like $1,000 when the plan is set up.
  • A performance plan: Employer contributions can be tied to a variety of different criteria, such as meeting sales targets, length of service and yearly performance.
  • Other customized matching plans can be developed.

2.   Lower fees: The average management expense ratio for a retail mutual fund may be from 2.3 to 2.6 per cent depending on the asset class. In contrast, a company-sponsored plan administered through an insurance carrier can typically negotiate much lower fees. In 2013 SPP had a management expense ratio of 1%.

3.   Payroll deduction: Payroll deduction promotes disciplined savings. Also, taxes withheld from the rest of your pay are reduced. It’s like getting your refund through the year, instead of when you file your tax return in April.

4.   The pros manage your money: The people who manage group insurance plans are usually the same people who manage other pension plans. They tend to be long-term investors and so are less likely to react impulsively to short-term events.

SPP hires independent money managers to invest member funds. The Plan’s Board of Trustees establishes the Investment Policy and then delegates investment decision making responsibility to the fund managers. The Board monitors investment performance quarterly and reviews the investment policy at least annually.

5.  Available retirement planning services: Most employer-sponsored programs offer full retirement planning services and information specific to you. These features are largely unavailable to an individual investor. Free in-house retirement education sessions are often included.

6.   Transfer of other retirement savings: Your employer may allow you to transfer RRSP or pension money from other accounts into the company plan. There is a huge advantage to aggregating your money in one account instead of having pots of money in multiple places. That’s because it’s much easier to develop an investment strategy if the money is under one umbrella. Also, the more assets there are in the plan, the lower the fees for everyone. SPP allows you to transfer-in $10,000 from your RRSP.

7.   Locking-in: If you can’t get your hands on the money easily when you want a new HD television or a new car, chances are better that you will have a bigger balance at retirement. A registered pension fund must generally lock-in your money until your early retirement date and the SPP is subject to the same rules. Money in Group RRSPs cannot be formally locked-in, but your employer may discourage you from withdrawing funds by suspending the company match for some period of time when you do so.

8.   Post-retirement options: When you retire, you will have to transfer the money in your DC pension plan or Group RRSP into personal accounts with financial institutions. If your company plans are with insurance carriers, some of them have established Group RRIFs available only to former members of group plans they manage for clients. While investment fees in these Group RRIFs may not be as low as in the original employer plans, they will generally not be as high as retail fees charged to individuals.

SPP members have several options for dealing with the funds in their account when they retire. One option is the simplicity of SPP annuities, through which your funds stay invested in SPP while you receive a fixed monthly pension for your lifetime no matter where you live.

Also see:
Ten Things You Need to Know About Your Company Pension Plan, Rob Carrick, June 9, 2012
Income that lasts a lifetime – MoneySense, Sarah Efron, April 2nd, 2012

Book Review: RRSPS THE ULTIMATE WEALTH BUILDER

By Sheryl Smolkin

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If an alien parachuted into Canada in the first two months of the year and needed to quickly understand the what, when, why and how of registered retirement savings plans (RRSPs), there is no better source of information than Gordon Pape’s new book RRSPs The Ultimate Wealth Builder.

The prolific writer has authored and co-authored over 20 books with down-to-earth investment advice, many of which have become best sellers. And this one is definitely another winner.

RRSPs were created by Louis St. Laurent’s Liberal government and have been around since 1959. Of course as Pape explains, there have been many important tweaks along the way.

  • Contribution levels have jumped from 10% of earned income (maximum of $2,500) to 18% of the previous year’s earned income (maximum of $24,270 in 2014.)*
  • Since 1996, unlimited carry-forwards of unused contribution room have been permitted.
  • Contributions can be made until age 71. The maximum age was reduced to age 69 as part of the government’s austerity program in 1997, but raised back to 71 in the 2007 budget. Now there is growing demand to bump it up further to age 73.
  • Registered retirement income funds (RRIFs) were added to the program in the 1970s, allowing taxpayers to further tax-shelter funds after retirement subject to mandatory minimum withdrawals.

Early chapters of the book set the scene with an extensive RRSP vocabulary (Chapter 2) and the rules relating to contribution levels, deadlines, carry-forwards and spousal plans (Chapter 3).

In Chapter 4 Pape says the most common mistake people make is to walk into their bank and say, “I want to buy an RRSP.” “You invest in an RRSP so the type of RRSP you select will have a huge impact on how your money will grow over the year,” he says.

If you are a regular RRSP contributor, you may think you have little to learn about the subject. But here are a few interesting tidbits I picked up that you may not be aware of:

  • You can contribute in one year and defer your tax deduction to a later year when your earnings are higher and the deduction is worth more.
  • If you don’t have sufficient cash but you have a self-directed RRSP, you can make a contribution “in kind” of another qualified investment at its fair market value. For example you can contribute a $5,000 GIC maturing in three years.
  • If you receive a retiring allowance or severance pay it can be transferred directly to your RRSP without withholding tax even if you do not have contribution room. You can transfer in $2,000 times the number of years or part years you were with the employer up to and including 1995 without withholding tax. You can also make an additional tax-free contribution of $1,500 for each year or part year prior to 1989 in which no money was vested for you in a pension plan or deferred profit sharing plan.

Pape also shares important details about making RRSP withdrawals for buying a home or returning to school and the complex RRSP mortgage and repayment rules.

For example, did you know that if your RRSP funds are used to invest in a mortgage for you or your children, interest payments have to be made at market rates?

In addition, non-arm’s length RRSP mortgages must be administered by an approved lender under the National Housing Act and insured either through Canada Mortgage and Housing or a private company like Genworth MI Canada.

Chapters 12, 13 and 14 thoughtfully address the perennial questions: RRSP or mortgage pay down? RRSP or debt pay down? RRSPs or Tax-free savings accounts.

The one area where I disagree with Pape is on the merits of an employer-sponsored Group RRSP. He says they are often not a great deal because employers can’t contribute to them directly; Group RRSP contributions reduce your total contribution level for the year; and Group RRSPs frequently offer a limited number of investment options.

In my experience working as Canadian Director of Research for a global actuarial consulting firm, smart employers view their Group RRSP as an important attraction and retention tool. They generally incent employee participation by grossing up salary to match or partially match employee contribution levels.

In addition, fees are often lower than individual RRSPs opened with retail financial institutions and there is a large (but not too large) selection of diversified investment funds for employees to choose from. Interactive websites plus in person and online education are also frequent valuable group RRSP add-ons.

What I do not disagree with is that RRSPs can be a powerful machine for creating wealth that you ignore at your peril! RRSPs The Ultimate Wealth Builder can be purchased online from Indigo books for $13. An e-reader version is also available for $13.99 from the Kobo bookstore.

*Contributions to the Saskatchewan Pension Plan of up to $2500/year form part of your RRSP contribution limits. You can also transfer $10,000 from your RRSP to SPP each year until you are 71 without tax consequences. In 2013 the SPP balanced fund earned 15.77%.

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October 28: Best from the blogosphere

By Sheryl Smolkin

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This week we have random posts from some of our favourite bloggers that consider how you can save for retirement, invest your savings and spend your money after retirement.

Robb Engen on Boomer & Echo thinks that many media money makeovers are unrealistic, and that we really need to prioritize our financial goals. He shares his portrait of the ideal saver.

When it comes to spending and saving money, for many of us monthly mortgage payments take the biggest chunk out of our earnings. From the archives of the Canadian Finance blog, Nelson Smith offers 6 ways to save thousands on your next mortgage.

Saving is not enough. You have to invest your money in a way that both minimizes risk and maximizes growth of your account. A Young and Thrift blogger explains how he finally overcame his inertia and invested the $100,000 cash he had in his accounts. Spoiler alert: He topped up his TFSA and RRSP and then invested in ETFs.

But the Canadian Capitalist says we can learn a thing or two on how to invest our own money from the manner in which the CPPIB invests our surplus Canada Pension Plan contributions.

And finally, however much you save and whatever your plans are, Kevin Press tells us how you choose to spend your retirement will be a compromise. That’s because recent Sun Life research revealed seven ways men and women disagree about retirement.

Do you follow blogs with terrific ideas for saving money that haven’t been mentioned in our weekly “Best from the blogosphere. Share the information with us on http://wp.me/P1YR2T-JR and your name will be entered in a quarterly draw for a gift card.