1. 1 CIFPs Annual Conference – June 2007 Pensions Update Patrick Longhurst, CFP, FCIA

2. 2 My 2006 presentation – Three central issues 1. Does the client fully understand the implications of the choices available? 2. What is special about him/her that will influence the decision? 3. Have you looked at the overall context in which the decision should be made?

3. 3 1.Understanding the implications Many people find pensions confusing! Make sure they understand the options available, plus A decision made about a “pure” pensions issue can impact on: Tax-sheltered contribution room Benefits payable upon death, disability or termination of employment Other post- retirement benefits

4. 4 2.What is special about the client? Pension options are costed by actuaries, based on average statistics from large populations On the other hand, your client is anything but average! How do your client’s expectations vary from the actuarial assumptions used for : Mortality? Investment returns? Earnings increases? Spousal details?

5. 3.Pension Decisions in Context 5 When to retire What form of pension Whether to buy back service Lump-sum or annuity When to take CPP/QPP Income sharing strategy Other Pensions Registered Investments Non- Registered Investments Post- Retirement Benefits Spousal Assets Other Income Sources Vision of Retirement Attitude to risk Global Economics Income Tax Rules Demographics Pension Legislation

6. 6 Key feedback All logic may point to one approach - but if the client or their spouse does not feel comfortable – forget it! Never be afraid to ask, “Is there anything else you want to tell me?” If the pension plan is Defined Benefit, ask about the funded / solvency status Not everyone likes RRSPs!

7. 7 Recent / impending developments The Tax Fairness Plan – Pension splitting The 2007 Federal Budget: – RRSP maturity dates – Phased Retirement Locked-in vehicles – LIRAs, LIFs and LRIFs: – Provincial variations – The trend to unlocking

8. 8 The Tax Fairness Plan Pension income splitting for tax purposes in retirement; major types of qualifying income: For individuals aged under 65, income from a Registered Pension Plan (RPP) For individuals aged 65 and over: Income from an RPP Income from an RRSP annuity Payments under a RRIF Proposed to be effective in 2007

9. 9 Pension income splitting – What can we expect? This is not the CPP approach – no cash will change hands! Both spouses must agree to the allocation The pension income will retain its character when transferred Up to 50% of eligible income can be split The changes will be effective in 2007

10. 10 Pension income splitting – Other implications This does not apply to Supplemental Executive Retirement Programs (SERPs) This can affect the amount and the transferring of non-refundable tax credits This could impact on the future of Spousal RRSPs The Provinces may introduce parallel provisions

11. 11 Pension income splitting - Example A couple, both born on January 1, 1955 The RPP member retires at age 55 with a pension of $60,000 per year – indexed to 100% of the CPI The member will apply for a full (70%) CPP at age 60 Both spouses will receive full OAS at age 65 The spouse has no other income The member will transfer 50% of the pension for tax purposes Other sources of income have been ignored Provincial and Federal savings included

12. 12 Pension income splitting - Example Year Total Tax Paid No Sharing $ 50/50 Sharing $ Difference $ 201014,20010,4003,800 201516,20011,8004,400 202022,50016,6005,900 202526,10019,2006,900 203030,10022,3007,800 203534,90025,9009,000

13. 13 Pension splitting – Issues for your client Makes taking a pension more attractive May impact on RRSP contribution strategy Must be acceptable to the spouse Projections look very attractive For further illustrations see the Department of Finance website www.fin.gc.ca/pensioncalc/index_e.html www.fin.gc.ca/pensioncalc/index_e.html

14. 14 Federal Budget 2007 – RRSPs and RPPs Extension of maximum age for converting an RRSP or an RPP to the end of the year in which the contributor is age 71 Transition rules for those affected Implications for estate planning and the OAS clawback Not necessarily to the client’s advantage Proposed to be effective in 2007

15. 15 RRSPs and RPPs – Issues for your client You will probably need some modeling. Issues include: – Does he/she have qualifying earned income or unused contribution room? – Does he/she have a younger spouse? – What is the balance between his/her registered and non- registered savings? – Is the claw-back an issue? Generally, this makes LIRAs more attractive by increasing their flexibility

16. 16 Federal Budget 2007 – Facilitation of phased retirement Applies to eligible members of DB Pension Plans who are aged over 55 and entitled to an unreduced pension Can draw a limited pension benefit while continuing to work and accrue new pension benefits Currently the only solutions available in most Provinces are to: Take the pension and move to another job Come back to work on a contract basis Postpone the pension until final retirement Proposed to be effective in 2008

17. 17 Phased retirement - illustration An individual aged 55, earning $100,000 per year, entitled to an unreduced pension of $60,000 per year Agrees to stay on until age 60, working half-time for $50,000 per year, increasing at 3% per year Decides to take an immediate pension of $30,000 per year – Part A Defers the other $30,000 which will continue to grow as an active member – Part B Assume future rate of return of 6% and life expectancy to age 85

18. 18 Phased retirement - Illustration Year Pension Payable Part A $Part B $ 200730,000- 200830,000- 200930,000- 201030,000- 201130,000- 2012 onwards30,00040,575 Present value of future pension in 2012 390,000527,000

19. 19 Phased retirement – Issues for your client Any member of a DB Plan, entitled to an unreduced pension usually loses value if they defer their pension commencement The phased retirement proposals help to reduce this loss There may be other issues which make this an excellent decision The client should be aware of the dynamics of the pension plan Alternative rules already exist in certain Provinces

20. 20 Locked-in pension money - Historic position Locked-in Retirement Accounts (LIRAs) were the successors of Locked-in RRSPs, designed to accept pension settlements and be administered under Provincial rules Originally LIRAs had to be converted to annuities by the end of the year in which the member reached age 69 Life Income Funds were introduced to allow more flexibility: Minimum withdrawals like a RRIF Maximum withdrawals based on a formula Must be converted to an annuity by age 80

21. 21 Locked-in pension money – Historic position (Continued) In some Provinces Locked-in Retirement Income Funds (LRIFs) were also introduced: – Same minimum withdrawals as a LIF – Different formula for maximum withdrawals – No requirement to annuitize at age 80 Unlocking was only permitted where the amount was trivial or in cases of shortened life expectancy

22. 22 Locked-in pension money – Recent developments in Alberta Alberta also has Defined Contribution Retirement Income Accounts (DC RIAs) that may be offered by a DC Pension Plan Changes effective August 10, 2006 – A one-time 50% unlocking option – A new LIF with no life annuity requirement and increased maximum withdrawal factors – LRIFs are to be discontinued

23. 23 Locked-in pension money – Recent developments in Manitoba Changes in January 2003: – LIF maximum withdrawal amounts based on prescribed annuity factors, LRIF factors unchanged – LIF requirement to purchase an annuity at age 80 removed Changes in May 2005: – LIF or LRIF owners aged at least 55 may apply for a one-time Prescribed Transfer to a Prescribed RRIF

24. 24 Locked-in pension money – Ontario 2007 budget provisions 25% unlocking of locked-in accounts Amended maximum withdrawal schedule for LIFs The new LIF replaces all existing LIFs and LRIFs No annuitization requirement Complete unlocking at age 90 Pension income splitting when Federal proposals receive Royal Assent

25. 25 Locked-in pension money Issues for your client Rules vary dramatically from Province to Province LIF maximum withdrawal factors can also show significant differences In theory any unlocking of pension money adds to the flexibility Initial experience is that paternalism was not necessary But what guidance does your client need?

26. 26 In summary The tax and legislative context is changing These changes can easily influence the balance between options available Keeping on top of these changes can be a challenge Hopefully this presentation has helped!

27. 27 If you want to contact me Phone: (416) 815-7200 Email: plonghurst@plasi.caplonghurst@plasi.ca Website: www.plasi.cawww.plasi.ca Patrick Longhurst

28. 28 Questions???