Are you retiring in Canada: Pillar 4: Real Estate and TFSA

There may be one more pillar for the Canadian who is thinking of retirement argues a new report by the C.D. Howe Institute (pdf file).This pillar is available to only 40%  of Canadians, well the other pillars are available to more of us.

These fourth-pillar assets – which include real estate, publicly traded securities, privately owned business investments, insurance products and tax-free savings account accumulations – significantly improve the outlook for Canadians’ retirement readiness, according to the report.

Jeremy Kronick and Alexandre Laurin, the authors of the report, focus on the group generally thought to be most at risk of inadequate retirement savings: employed 35-to-64-year-old Canadians. After factoring wealth already accumulated from all fourth-pillar assets, the authors found that 40 per cent of this group has potentially already accumulated sufficient wealth to sustain themselves in retirement.

Canadian households can count on various sources of wealth in retirement, notes the report. Government payments through the old-age security benefits and the guaranteed income supplement program provide a basic income for all Canadian retirees. These payments are complemented by the Canada/Quebec Pension Plan.

Combined, these government programs provide a guaranteed annual income stream and form pillars one and two of the Canadian retirement income system, according to the report. For the third pillar, the report points to workplace pension arrangements such as defined contribution and defined benefit pension plans, tax-deferred retirement savings plans and individual registered plans.

“Much of the policy debate in Canada around the adequacy of retirement saving has ignored the role of fourth-pillar assets or has tended to acknowledge their potential role but ultimately dismisses their importance,” states the report. “Despite this lack of attention by policymakers, private wealth accumulated in assets other than pension and retirement saving plans can provide a significant source of retirement capital.”

Are you retiring in Canada this year, Pillar 3: Employer pension plans

Understanding your employer pension plan

The two main types of employer pension plans include: 

·         Defined benefit pension plan (DBP)

·         Defined contribution pension plan (DCP) 

The following table below compares the two. 

Characteristics	Defined contribution pension plan (DCP)	Defined benefit pension plan (DBP)
What is it?	·         DCPs are a form of savings for retirement where you and your employer contribute an established amount to your pension each year. ·         Your contribution is usually a percentage of your pay. ·         The value of the pension is based on the performance of the investments. ·         Amount of the pension is uncertain.	·         DBPs are an agreement where the employer promises to pay a certain amount of money each year after retirement. ·         Employees often but do not always make contributions in addition to their employer’s contribution. ·         How much you receive depends on a formula, generally based on your income and years worked.
How is it managed?	·         Generally, you have to choose how your contributions are invested. ·         Consider the level of risk and time frame when making investment choices.	·         Your contributions are pooled into a retirement fund and managed by your employer or pension plan administrator/sponsor. ·         Investment results affect the amount of the employer’s contributions.
Advantages	·         You have more control. ·         You can invest in a way that suits your goals and risk tolerance. A financial professional can help you understand the risks of various investments. ·         You have the possibility of benefiting from higher returns if your investments perform well.	·         The amount of your pension is set primarily on a set formula often based on your career earnings and years of service and is therefore generally less sensitive to annual returns in the stock market.  ·         Funds are professionally managed and you are not required to make any additional investment decisions. ·         Your investment risks are pooled across time and different individuals, so that investments have time to recover from really bad years and/or benefit from years with really good returns.
Disadvantages	·         The amount of retirement income is not guaranteed. If your investments do not perform well, you have to deal with it yourself. It could be affected by the ups and downs of the stock market. ·         Some people are not comfortable managing their own retirement fund or investments. ·         Because of the limited advice available, obtaining separate financial advice may involve additional costs. ·         You may not be able to invest exactly the way you want as the employer may offer only a limited number of investment options within the plan.	·         The risk that the fund is not managed properly or that your employer experiences financial troubles or even bankruptcy can affect the amount of your pension. ·         You are not able to directly benefit from high stock market returns. These are passed along to all members in various ways (often in terms of lower contributions or increased benefits).

Both DCPs and DBPs have advantages and disadvantages, but ultimately you won’t have a choice over which type of pension plan your employer has in place. What’s most important is that you fully understand how your pension plan works.

Your pension will likely be a cornerstone of your retirement income, so if you don’t know how your pension works, be sure to speak to your human resources staff member, union representative or pension plan manager to find out.

Group Registered Retirement Savings Plan (Group RRSP)

A Group RRSP is an employer-sponsored retirement savings plan, similar to an individual RRSP, but administered as a group by your employer. Your contributions are made through regular pay-roll deductions on a pre-tax basis.

While Group RRSPs function similar to individual RRSPs, the details of the plan often vary by the employer. For more detailed information on your Group RRSP, consult your human resources, union, or pension plan representative.

Pooled Registered Pension Plan (PRPP)

Pooled registered pension plans (PRPPs) are a new type of pension plan to help Canadians save for retirement. PRPPs are designed mainly for people who do not have access to a workplace pension, such as employees of small-sized and medium-sized businesses, and self-employed individuals.

The federal Pooled Registered Pension Plans Act (the federal PRPP Act) and the Pooled Registered Pension Plans Regulations (the Regulations) came into force on December 14, 2012. 

How do PRPPs work? 

PRPPs are defined contribution (DC) pension plans. In a DC plan, you and your employer contribute a certain amount to your pension each year. In the case of PRPPs, employer contributions are optional. DC plans do not guarantee how much you will receive when you retire. Your pension income depends on how well the investments held in your DC plan perform.

Employer participation in PRPPs is voluntary. To set up a PRPP, an employer must enter into a contract with a PRPP administrator. PRPPs are administered by licensed third parties such as banks or insurance companies, not employers.

Once an employer enters into a contract, employees are automatically be enrolled as members unless an employee chooses to opt out. Members’ contributions to the pension plan will be made through deductions from their pay.

Who can join a PRPP under the federal PRPP Act and Regulations?  

You can join a PRPP offered by your employer if: 

·         you are employed in a federally regulated business or industry (such as banks, telecommunications companies, interprovincial transportation sectors, etc.) anywhere in Canada and your employer offers PRPPs

·         you are employed in any type of work in the Yukon, the Northwest Territories or Nunavut. 

You can join a PRPP on your own if: 

·         you are employed in any type of work in the Yukon, the Northwest Territories or Nunavut and your employer does not offer PRPPs

·         you are self-employed in the Yukon, the Northwest Territories or Nunavut. 

Note: The availability of PRPPs for provincially regulated employers, employees and self-employed individuals will depend on provincial government decisions on whether to put in place similar provincial legislation. 

Provinces  

Quebec: Voluntary Retirement Savings Plans

In 2013 the Quebec Government introduced the Voluntary Retirement Savings Plans Act for employers with businesses in Quebec – Voluntary Retirement Savings Plans (VRSPs) are Quebec’s version of PRPPs.

VRSPs and PRPPs are similar in many ways.  However, one of the main differences is that employers with businesses in Quebec with more than five employees must offer their employees a VRSP, a Tax-Free Savings Account, or another retirement savings plan, however, employees have the right to opt-out. 

For more information on VRSPs visit the VRSP section of the Régie des rentes du Québec website and for more detailed information on eligibility see section 45 of the Voluntary Retirement Savings Plan Act. 

More key facts about PRPPs 

·         PRPPs must be low-cost. This means that the costs charged to plan members must be at or below those charged to members of defined contribution pension plans that provide investment options to groups of 500 or more members.

·         Costs include all fees, levies or other charges that reduce a member’s return on investment, other than those triggered by the actions of a member, such as requesting copies of documents.

·         Under the federal PRPP Act, the Office of the Superintendent of Financial Institutions issues licenses for administrators to offer PRPPs.

A few things to keep in mind about employer pension plans 

If you have a defined contribution pension plan, contributing at least the amount your employer will match will enable you to fully benefit from your employer’s contributions. 

Many people switch jobs and careers throughout their working lives, which means many people might have two or more smaller pensions from different employers. 

If this is the case for you, be sure to investigate what’s best for you. Are you able to transfer your old pension to your new plan? Talk to a financial professional or your human resource advisor to better understand your options.

Are you retiring in Canada this year, Pillar 2: Canada Pension Plan (CPP)

The CPP operates throughout Canada, except in Quebec. Quebec has its own program called the Quebec Pension Plan (QPP) for workers in Quebec.

The CPP retirement pension is a monthly benefit paid to those who have contributed to the Canada Pension Plan. All Canadians over the age of 18 who earn $3,500 or more per year have to pay into the CPP. The amount you pay depends on how much you earn.

The Plan is designed to replace approximately 25 percent of the earnings on which your contributions were based over your working life. You make contributions only on your annual earnings between a minimum and a maximum amount (these are called your pensionable earnings). 

The minimum amount is frozen at $3,500. The maximum amount is set each January, based on increases in the average wage in Canada. In 2014, the maximum amount is $52,500. The contribution rate on these pensionable earnings is 9.9 percent, split equally between you and your employer. If you are self-employed, you pay the full 9.9 percent.

The average monthly payment in October 2013 was $534.51 among all beneficiaries and $594.19 among new beneficiaries aged 65. You have to apply for CPP benefits. 

The amount of your CPP benefits will depend on several factors, including how long you contributed to the plan, how much you contributed, and finally, the age at which you choose to begin receiving your CPP retirement pension. You can choose to begin collecting your CPP benefits at any time between ages 60 and 70. 

The age at which you begin receiving your CPP benefits will have a major impact on the payments you will get for the rest of your life.  There are other types of benefits that are available within the CPP:

1.  CPP Post-Retirement Benefit is a new cumulative monthly benefit paid to individuals who worked and made CPP contributions while receiving the CPP retirement pension.

2.  CPP Disability Pension is a monthly benefit available to people who have made enough contributions to the CPP and whose disability prevents them from working at any job on a regular basis. A disability pension converts to a CPP retirement pension at age 65. The average monthly benefit in October 2013 was $855.49.

3.  CPP Survivor’s Pension is a monthly pension paid to the legal spouse or common-law partner of a deceased contributor to the CPP. The average monthly benefit in October 2013 was $325.69.

4.  CPP Death Benefit is a one-time, lump-sum payment made to, or on behalf of, the estate of a deceased CPP contributor. The average one-time payment in October 2013 was $2,286.03.

For more detailed information on the CPP, visit the Service Canada website.

Canada Pension Plan Investment Board (CPPIB)

The Canada Pension Plan Investment Board (CPPIB) is a crown corporation that was created to help manage and grow the money in the Canada Pension Plan (CPP).

The CPPIB takes the money that is left in the CPP after all benefits have been paid out and invests it in a number of different assets. To learn more, view CPPIB’s infographic An Introduction to Canada Pension Plan Investment Board (CPPIB).

Quebec Pension Plan (QPP)

The QPP is a mandatory public insurance plan for those who work, or who have worked in Quebec. It provides them and their families with basic financial protection in the event of retirement, disability or death. The QPP works similarly to CPP as it is funded by contributions from Quebec workers.

Similar to CPP, the amount of your QPP payments will depend on several factors, such as how much you contributed, how long you contributed and when you chose to start collecting the benefit. For more information on the QPP, visit the Régie de Rentes du Quebec website.

Note: Pension plan benefits (such as Old Age Security, and the Canada Pension Plan are protected against inflation because they are indexed to the Consumer Price Index. This means that if the cost of living goes up, the value of the benefit goes up accordingly.

However, personal savings and investments, such as mutual funds or GICs, are generally not protected against inflatio

Are you retiring in Canada this year, Pillar 1: Canada’s public pension system

Many more people are retiring this year, so I want to take a look at the three pillars of the Canadian Pension System over the next few posts. 

Pillar 1: Canada’s public pension system

The majority of today’s Canadian seniors receive income from Canada’s public pension system. The two main pension programs that provide benefits are the Old Age Security program (OAS) and the Canada Pension Plan (CPP) or Quebec Pension Plan (QPP). Keep in mind that these benefits are taxable income. Old Age Security (OAS)

If you are a Canadian citizen or legal resident, have lived in Canada for more than 10 years after turning 18 and are 65 or older, you may be eligible to receive OAS. OAS is not tied to contributions you have made, and whether you qualify for a full pension or a partial pension depends on how long you have lived in Canada. For further information concerning  OAS eligibility, visit Service Canada.

Note: OAS benefits do not necessarily begin automatically. You may have to apply for OAS benefits.  There are four types of benefits available within the OAS program:

1.  The Old Age Security pension—a monthly benefit available to all Canadians 65 years of age and over who meet the legal status and residence requirements. (The average monthly payment in October 2013 was $520.10).

2.  The Guaranteed Income Supplement (GIS)—a monthly benefit available to Canadian seniors who receive an OAS pension and have little or no other income. (The average monthly payment in October 2013 was $500.56 for single individuals).

3.  The Allowance—the monthly benefit available to eligible low-income Canadians who are between 60 and 64 and have a spouse or common-law partner who is receiving the GIS. (The average monthly payment in October 2013 was $433.73).

4.  The Allowance for the Survivor—a monthly benefit available to eligible low-income Canadians who are between 60 and 64 and are widows or widowers. (The average monthly payment in October 2013 was $641.87).

Automatic enrolment

Proactive enrolment of OAS benefits was announced in Budget 2012 and is being phased in, starting in 2013. Individuals who do not receive a notification letter indicating that they will be automatically enrolled for the OAS pension are required to apply for their OAS pension. 

For more detailed information about Old Age Security, visit Service Canada.