Retirement Income Sources - Situational Financial Planning, Legal & ID Shield, Halifax, Nova Scotia, Canada

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Retirement Income Sources

"You have to do it by yourself and you cannot do it alone."
                         - Martin Rutte (Author, speaker)
Canada Pension Plan (CPP)  (How to check your balance)
The CPP operates throughout Canada, except in Quebec. Quebec has its own program called the Quebec Pension Plan (QPP), for workers in Quebec. How much you receive from the CPP is based on how much, and for how long, you made contributions to the CPP. The age at which you retire also affects the amount you receive. Application should be made six months prior to needing the benefit. Ensure planning takes this into consideration.

Post-Retirement Benefit (CPP)
The Post-Retirement Benefit is a new program that is associated with the Canada Pension Plan. It requires those individuals aged 60-65 to contribute who are receiving the CPP retirement pension while they continue to work. Basically, such people are receiving a pension and paying for the same pension at the same time. After age 65, the Post-Retirement Benefit is not mandatory and is no longer paid starting at age 70.

Old Age Security (OAS)
Old Age Security is the retirement pension received by every Canadian at age 65 who meets the criteria for residency. Beginning in 2023, the age at which OAS benefits will be available will begin to increase. By 2029, the benefit age will be increased to age 67. The pension is paid as either a full pension or partial pension.

Guaranteed Income Supplement (GIS)
The Guaranteed Income Supplement (GIS) is a federal government retirement pension paid to low-income earners who receive Old Age Security. The amount to be received is based on marital status and other income received. It can begin in the same month as OAS.

Defined Benefit Plan (DBP)
A defined benefit plan (DBP) is one form of registered retirement pension plan provided by employers. As the name suggests the benefit (income) is defined while the contribution required to fund the income will change.

Defined Contribution Plan (DCP)
A defined contribution plan (DCP) is a form of registered retirement pension plan provided by employers. It is a type of company pension that is also known as a money purchase plan because on retirement the money accumulated in the plan is used to purchase a pension, provided in the form of an annuity or from an account, such as a life income fund.

Deferred Profit Sharing Plan (DPSP)
A deferred profit sharing plan is a retirement savings plan offered by employers for their employees. Only the employer contributes to the plan. The funds are not locked in and when the employee retires, he or she can take the plan value in cash or in an installment payment plan or transfer the money to an RRSP or an annuity.

Fixed-income Investments
Fixed-income investments provide safety to their investors. Because these investments are low risk, their returns will be less than a higher risk investment.
Fixed-income investments include:
Savings accounts, Guaranteed Investment Certificates (GICs), term deposits and bonds
Mutual funds and segregated funds are available that invest only in fixed-income investments.

Annuities are a guaranteed investment because the contract owner is guaranteed to receive a return of his or her capital plus interest. The exception to this is if the contract owner has chosen to deposit his capital into a variable annuity. Instead of receiving a guaranteed interest rate, he or she will receive annuity payments based on performance of the stock market. The amount of benefit from a variable annuity is not guaranteed.

Registered Retirement Income Funds (RRIFs)
A Registered Retirement Savings Plan (RRSP) account must be closed at the end of the year the plan owner turns 71. To continue the tax deferral provided to the plan owner with an RRSP, he or she could transfer the money to an annuity or Registered Retirement Income Fund (RRIF) account. If one or both of these two options are not used, the RRSP account owner will find that he or she will take the balance of the RRSP account into income, and pay tax on that balance. A RRIF can only be funded by RRSP transfer. It can be set up at any age; however, as soon as it is established withdrawals must begin in the next year according to the minimum withdrawal
amount determined by the age of the account owner, or his or her spouse if the account owner has chosen to base withdrawals on the spouse’s age.

Restricted Life Income Fund (RLIF)
A Restricted Life Income Fund is an account to which those with a federally regulated pension transfer their pension savings on retirement. It is the equivalent of a Life Income Fund, but used only for those who have a federal pension. This is a locked-in account.

Retirement Compensation Arrangement (RCA)
An RCA is used by a company to create retirement income for a key employee. For every contribution made by the company, 50% is deposited with the custodian to be invested in an investment account and the other 50% is deposited with the Canada Revenue Agency as a refundable tax in a non-interest bearing account. Then, 50% of all interest income, dividends and realized capital gains earned in the investment account must be remitted to the refundable tax account. As the employee receives benefits, CRA refunds $1 from the refundable tax account for every $2 paid by the custodian. Payments can be a lump-sum or as supplementary retirement benefits.
The employee has no tax repercussions from the arrangement and pays tax as income is ultimately received.

Spousal Registered Retirement Savings Account (RRSP).
A Spousal Registered Retirement Savings Account is one way to "split income" in retirement if one spouse is expected to pay less tax than the other. It is also useful for the tax deduction a contributor will receive if he or she is older than age 71 and can no longer contribute to his or her own RRSP, but whose spouse is younger and still has an RRSP.

Tax-free Savings Accounts (TFSAs)
A Tax-free Savings Account (TFSA) is a registered investment account designed to encourage savings. A TFSA has two chief benefits: Investment growth that occurs within the account is not taxed and withdrawals are not taxed. To open a TFSA, a Canadian must be at least 18 years old. There is a maximum dollar amount of contribution that can be made in a year. As of 2014, that maximum is $5,500. If the maximum contribution is not made in any one year, it can be carried forward to a future year or years. Contributions are not tax deductible.

Individual Pension Plan (IPP)
An IPP is a defined benefit pension plan created for one member. Contributions are typically made only by the company that creates the plan. It is only suitable for those who earn $100,000 or more. It offers a higher contribution limit than an RRSP and therefore benefits the individual. The company however is committed to the plan once it is started.

Life Income Funds (LIFs)
At the end of the year when a person with a Registered Retirement Savings Plan (RRSP) turns 71, if he or she does not want to receive all the money in the plan as cash, he or she must transfer the money out of the RRSP. Most often, that money is moved into a Registered Retirement Income Fund (RRIF) so that tax deferral can continue. Someone who has a Locked-in Retirement Account (LIRA) or a Locked-in RRSP must also transfer their money from these accounts by the end of the year when they turn 71. A Life Income Fund is one of the choices available to them.

Life Annuities
An annuity makes a regular payment, called the benefit, to a person who is called the annuitant. A life annuity pays that benefit for the entire life of the annuitant. Once payments begin, they cannot be stopped and withdrawals cannot be made.

A life straight annuity guarantees the annuitant a benefit for life. When the annuitant dies, the contract terminates.

A life annuity with guaranteed payments is provided as "life plus five-year guarantee" or "life plus ten-year guarantee." If death occurs during the guarantee period, the beneficiary of the contract is guaranteed to receive the balance of what would have been paid during the period. For instance, an annuity that was paid annually for a "life plus ten year" the contract would guarantee ten payments would be made to the annuitant. If the annuitant died after two payments, the beneficiary would receive the equivalent of eight payments.

A cash refund annuity guarantees the annuitant a benefit for life. If, at the time of death, the amount that has been received as the benefit does not equal the amount that was contributed to the annuity, the difference between amount received and amount contributed is paid to the beneficiary in a lump sum.

An installment refund annuity is exactly the same as a cash refund annuity except the payment is made to the beneficiary in installments.

Joint and Last Survivor Annuity
This annuity is normally used by a married couple. One spouse receives the income until death and then the other spouse receives the income until death. That ends the annuity.

Term Certain Annuity
An annuity makes a regular payment, called the benefit, to a person who is called the annuitant. A term certain annuity, pays that benefit over the term of the contract. The term may be a period of years, or to a selected age.

Uses for term annuities:
- A term certain to age 90 annuity is the form of annuity that must be selected when an RRSP is being matured into an annuity.
- One of the options available to continue tax deferral when the owner of a Registered Retirement Income Fund (RRIF) dies is for the spouse to use the funds in the RRIF to buy a term annuity to age 90.
- A term annuity to age 90 may be used if the funds in the RRIF are to be used by a child or grandchild who was dependent on the RRIF owner due to physical or mental infirmity.
- RRIF funds can also roll-over on a tax-deferred basis to a financially dependent child. A term annuity can be used for this purpose and its term will be the number of years remaining until the child turns 18.

Index-Linked Annuity
The rate of return for this form of annuity is linked to the return of a market index, such as the TSX. Like payments from a variable annuity, the payments from an index-linked annuity are unpredictable and will change according to the higher or lower value of the index. An investor could benefit from an upward stock market trend with this type of annuity without having to invest in stocks directly. Some products are combination with part of the income guaranteed and part variable.

Impaired Risk Annuity also know as Enhanced or Enriched Annuities
Some companies offer impaired annuities for people with health problems severe enough to affect their life expectancy. Income payments are higher than the standard life annuity and won’t decrease, even if medical advances improve the annuitant’s life expectancy.

Some companies offer indexing to help offset inflation. You may choose to have income payments increase at a fixed annual rate, to a maximum of four per cent for registered annuities and six per cent for non-registered annuities.

Prescribed Annuity
Subject to legislative restrictions, you may be  eligible to have income from your non-registered annuity taxed in equal amounts for the life of your annuity. Prescribed annuities level out tax payments and provide more after-tax income up front.

Life Insurance - Death Benefit
1. As a lump sum paid by cheque to the beneficiary.
2. As interest. The insurer invests the death benefit and pays the interest earned on the
death benefit to the beneficiary. Payments are made on a regular basis.
3. As installments. A portion of the death benefit plus interest is paid to the beneficiary. A fixed period option pays the installments over a period of time. A fixed amount option pays the installments in equal payments.
4. As a life annuity. The death benefit forms a single premium to buy a life annuity for the beneficiary.

Insured Annuity
An insured annuity is a combination of an annuity with a permanent insurance policy. It is not appropriate for use by those with less than $100,000 to invest in the annuity. How it works is that an application is made for the life insurance policy with one insurance company. Once that policy has been issued, an annuity is taken out with a different insurance company. Thus, the annuity forms an income stream for the annuitant. Part of the annuity payment is used to pay the premium on the life insurance policy that names the annuitant as life insured. The face amount of life insurance is the same amount as was invested in the annuity. On death of the life insured/annuitant, the face amount of the insurance is paid to beneficiaries tax free. So, while it may appear that the annuity has diverted the capital from those who anticipated inheriting the amount invested in the annuity, the heirs end up receiving the same amount as if the annuity had not been purchased.

You probably have more questions including how everything fits together or maybe you are looking for a second opinion.  CONTACT INFORMATION


Paul is a Certified Financial Planner (CFP) licensed by the Financial Planners Standards Council; Financial and Estate Plans are provided under that license.

The information contained in this website is intended to provide general guidelines only. The application and impact of the law can vary widely from case to case based on the specific or unique facts involved. Accordingly, the information in this article is not intended to serve as legal, accounting or tax advice. Users are encouraged to consult with their professional advisers for advice concerning specific matters before making a decision.

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J. Paul Wilson, CFP®, ChFC®
Certified Financial Planner
27 Blue Thistle Road Halifax, Nova Scotia, B3S 1M3
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