Let’s analyze The Civil Superannuation Service Board (CSSB) pension, and what it means as you approach retirement.
I work on several of these and it is a quite common request to perform a pension analysis which are not always easy. So, if this is something that’s on your mind and something you want to consider, please go to speaktorob.com – we’ll be happy to schedule a no obligation call with you at your convenience.
It brings me great joy to talk about pensions. You’ve worked hard your whole life. Now you’re wondering, what the heck do I do?
So, the first thing you should be thinking of doing, is getting a commuted pension value quote and a list of your pension options.
Let’s pretend you have a defined benefit pension and you have received a statement. You’re thinking of retiring in a year or two or three. That statement gives you an evaluation of some sort or an actuarial valuation of the pension.
You’ll likely get that from HR, your online pension portal or you can ask your manager how to get that form. Once received, then we can get to the point of starting an analysis.
There will be all sorts of information on the statement: how much you’re getting, the communing value, etc.
Here’s the thing, the values are based on actuarial rates. So, when you get your pension, there’s likely to be multiple different numbers in terms of your monthly pension.
- X’ many dollars per month.
- A survivor’s benefit for ‘X’ many dollars per month.
- 66% survivor’s benefit of ‘X’ many dollars per month.
- A 10-year survivor.
- A lifetime survivor.
There are a number of options on the defined benefit side.
On the commuted side, that means you are taking the money out of your pension and you are taking it in your name personally through either a Locked-In Retirement Account, an RRSP or whatever other options you might have when you’re commuting a pension.
That money becomes yours, you own it and control it! You’ve commuted your pension, that money’s in your name and your account through a Locked-In Retirement Account or through an RRSP.
Let’s take a look at a few of those scenarios and see what that looks like.
First of all, I want to make sure that you guys know that CRA puts a maximum on the amount that you’re able to transfer as a tax-free rollover to a registered account. This is based on your age and a pension multiple.
The pension will be rolled over into as the maximum amount through into a LIRA, depending on if you have additional RRSP contribution room, you can then shelter all or a portion of the ineligible transfer amount to contribute directly to an RRSP. And that can be done through a tax elected form.
If you’re taking the commuted value out, the statement will indicate the maximum you can convert to a LIRA. You will also know your RRSP contribution room, which will allow you to roll over a portion of the commuted value into an RRSP and the rest will become what’s called taxable income. It will just be non-registered income.
Regarding the non-sheltered income, there’s a couple of things we could do with that.
Of course, we want to consider a TFSA, the Tax-Free Savings Account. You can contribute there. Now, if your income is going to be high for the year, you need to remember that you’re tacking on that other income.
One fantastic strategy that we suggest is that you can elect to take your retirement very early in the following calendar year so that your annual income for that year will not be reflective of an entire year’s worth of salary. It will be reflective of a week or two weeks or a month.
Ideally, if you’re a high-income earner, you’re commuting your pension and you have a non-registered portion of your pension that will be coming out, you will want to be retiring effectively on January 1st or early in January so that there’s no declared income, no T4 income for that year. The only income you’re getting is your pension income. That is tax planning, tax optimization at its finest.
That’s something we would help our clients plan for and structure. We need to ask ourselves, is it better to retire earlier or later in the year?
It seems like an afterthought, right?
I’ll retire when I want to retire, but when it comes to tax planning, these things can make a huge difference for your wealth.
Pros and cons of commuting your pension
Here are the most considerable pros and cons of commuting. The greatest pro of commuting is that you own the assets. So, commuting your pension, you get a lump sum, you get cash, you own that and have full control over it. The assets are in your name. If you pass away, if you have a spouse, you get a spousal free rollover of 100%. So none of the dollars disappear.
On top of that, if your spouse passes away, or you have no spouse, the money remains in your estate. It will go on to your kids, your charities, your legacy or whatever you want to do with your wealth.
That is by far the greatest pro. The other pro is the flexibility. The flexibility of commuting a pension. Perhaps you want to spend more in your early retirement than you want in your late retirement?
The defined pension does not allow you to do that. It’s going to be a fixed amount. ‘X’ many thousands of dollars every month for the rest of your life. Well, when you’re 95, you’re probably not going to want to spend the same amount as when you’re 65. At least, that’s what I’ve noticed for most of my clients.
The commuted value of the LIRA and the RRSP allows you to draw more earlier and less later on. It gives you much more flexibility, gives you the opportunity to take larger lump sums out, or if you are generating income already, you can take smaller lump sums out.
It offers you a ton of flexibility and it also gives you the flexibility to invest your money however you want.
These pensions are based on actuarial rates, so when they are commuting these values, they’re based on the current actuarial interest rates. The higher the interest rates are, the less your commuted value will be. Vice versa, the lower the interest rates are, the higher your commuted value will be.
You probably know that this decade has been a decade of low interest rates. If interest rates remain low, the commuted value for some is likely going be a more advantageous option depending on the pension and what it looks like.
Health benefits in your retirement
Take a look and decide if you want to continue to have anything with respect to health, travel, insurance and other similar benefits. Those are the kind of things we look at because now, you’re no longer employed.
Maybe you don’t have certain benefits anymore. This is something that we need to consider.
You’ve got all these numbers in front of you and you’re unsure about what to do. We’ve done hundreds of these. We do it all the time. We provide you with the advice and we provide you with the math.
At the end of the day, it’s based on math. It’s a math calculation that has your cashflow projected for your retirement. And the important thing to note is that it is not a cookie cutter analysis that is required. We need to take into account your unique situation, goals and your income.
Are you able to income split? Are you getting CPP and OAS? Do you have other corporate income? Is there anything else happening in your life that can mitigate the tax that you’re paying?
If you are interested in a holistic pension plan analysis, please go to speaktorob.com, we’d love to chat about that more with you.
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