Sources of income retirement (3)

The Ritcey Report

March 9, 2017

This is the third of a three-part commentary about an issue central to the financial well being of our friends in Nova Scotia approaching retirement age.

Many Canadians have investments within a Registered Retirement Savings Plan (RRSP or RRSPs) that they have built up over the years. And, to complement these accumulated retirement funds, they are also investigating other sources of retirement income such as Old Age Security (OAS), the Canada Pension Plan (CPP) and the Guaranteed Income Supplement (GIS). But none of these completely exhaust retirement income possibilities. Here are some additional retirement income options:

Reverse Mortgage

When you take out a mortgage, you are receiving a loan from the bank that you pay back over time while your home provides the collateral for the loan. As the name implies, the Reverse Mortgage works the other way around. It is a way
to withdraw some of the value of your home allowing you to receive funds today while still living in your residence. The proceeds can be paid back when the home is sold.

Leveraging a Universal Life Insurance Policy

Using a Universal Life Insurance Policy can also be a tax effective way of receiving funds in retirement while still being able to leave an inheritance on your death. This approach needs to be carefully structured.

Tax-Free Savings Accounts (TFSAs)

As of January 1, 2009, the federal government provided a new tax-efficient savings vehicle for Canadians called the Tax-Free Savings Account (TFSA). The TFSA allows taxpayers 18 and over to contribute up to $5,500 per year (in 2016) into the account where any income earned grows tax-free, and funds may be withdrawn with no tax implications. The range of investments available is essentially the same as provided with an RRSP. The major difference between the TFSA and an RRSP is that there is no “income tax” deduction allowed for TFSA “contributions”.

Pension Plans

You may be a member of a company pension plan or plans and at retirement will be eligible to receive pension benefits. There are two types of pension plans:

  1. Defined Contribution Plans (also known as Money Purchase Plans)
    These are fairly simple plans and similar to an RRSP. Your employer and – in many cases – you contribute to the plan. Your eventual pension amount will depend on how much the contributions have grown by the time you retire.
  2. Defined Benefit Pension Plans
    These plans are more complex and at retirement provide a specified amount of pension as determined by a formula.

Receiving benefits

If you have a Defined Benefit Plan, your pension payments will start when you retire. If you have a Defined Contribution Plan, you will receive a lump sum from your pension plan. You have a number of options with respect to what you can do with that lump sum.

a. Purchase an annuity
You can use the lump sum to purchase an annuity, which is a contract that provides you with a specified payment over a specified time period. For example, an annuity may provide you with $25,000 per year to age 90. There are a number
of different types of annuities you can buy.

b. Transfer the lump sum to a Locked-In Retirement Account
If you are not ready to start drawing money from your pension, you can transfer (with no tax implications) the accumulated value to a Locked-In Retirement Account or LIRA. A LIRA is a Registered Retirement Savings Plan (RRSP) that is locked-in under pension legislation. The money in a LIRA can be invested in anything that suits you, giving a great deal of flexibility.

When you are ready to start receiving the pension you can buy a life annuity, as described above, or transfer the funds into a Life Income Fund (LIF) or a Locked-in Retirement Income Fund (LRIF). With LIFs and LRIFs, the money can be invested in any RRSP-eligible investment that suits your circumstances.

Under tax law you will be required to withdraw a certain amount of the value of the LIF or LRIF each year and will be fully taxed on it. However, you are also limited with respect to the maximum you can withdraw.

In offering this overview of retirement income options, it is important to note that each one contains important nuances and qualifications needing discussion with a knowledgeable professional.

For further information and advice, please contact Dave Ritcey, Portfolio Manager at The Ritcey Team of ScotiaMcLeod®, a division of Scotia Capital Inc. , Tel.: 902.678.0048