QUESTIONS FROM CLIENTS: HOW DOES MY PENSION WORK?

QUESTIONS FROM CLIENTS: HOW DOES MY PENSION WORK?

If you have a Defined Benefit Pension Plan (DB Pension), you likely have questions about how it works and how it interacts with your overall financial plan. In our latest Question From Clients video, Kelley Doerksen, CFP® explains some of the key information you need to know about these plans.

It’s common to have a pension from your employer that you contribute to and know very little about! Especially if you contribute to a “Defined Benefit” pension (often referred to simply as a DB pension). While each pension is unique, let’s look at 6 similarities:

1. Predictable Income for a Lifetime

Once retired and your pension begins, a DB pension will pay you a set amount of income for your lifetime. Some pensions also offer indexing, which will increase your income by some percentage of inflation.

2. Income for spouse or partner on death

Many DB pensions allow you to choose if your pension will continue to be paid to a spouse or partner in full upon the death of one of the pensioners, or if it will continue at a reduced rate. The choice you make at retirement will influence the amount of pension income you receive for life.

3. Guarantees

Most DB plans allow you to choose a guarantee period. This is not related to how much time you will receive your pension income for (remember, these plans pay for life), but relates to how long a death benefit would be made available to your beneficiaries upon death of the pensioner(s).

4. Commuted Value (lump sum transfer) is an option

When you leave the plan, either due to retirement or leaving the employer, most plans allow you to take a commuted value (lump sum). This lump sum can be transferred in part without immediate tax penalty to a LIRA (Locked-in Retirement Account), however often there is also a taxable portion to consider. You should always make sure that any immediate tax hit does not erode the assets available to you in such a way that you cannot equal your predicted pension income. This is a complex decision, and assistance from your financial planner will be valuable.

5. You are making contributions

Nearly all Defined Benefit pensions require a contribution from the employee as well as the employer. In fact, most DB pensions have relatively large contribution requirements of their employees in the range of 10 – 11% of your gross salary. You can be assured that the employer contributes at least as much as you do.

6. Limited Reporting

Many DB pension holders receive a statement only once annually. This is different than what you may be used to with your investment reporting. Since your value from a DB pension comes from the income you will be provided with at retirement, there is little need to receive more frequent statements as the ‘value’ is related to your years of service (and other factors), not specifically investment returns.

 

If you have questions about how your Defined Benefit Pension interacts with your overall financial plan, please reach out to us and one of our financial planners would be happy to walk you through your specific details.

WHAT IS THE DIFFERENCE BETWEEN A TFSA & RRSP?

WHAT IS THE DIFFERENCE BETWEEN A TFSA & RRSP?

We often get asked what the differences are between a TFSA (Tax-Free Savings Account) and RRSP (Registered Retirement Savings Plan) account.

We’ve put together this summary to review the primary differences and rules pertaining to each account. If you have any questions, please reach out to us here.

TFSA vs. RRSP Accounts

 

TFSA (Tax-Free Savings Account):

  • There is no deduction available, but no tax on withdrawals
  • TFSA contribution limit is cumulative, less contributions; withdrawals provide room back (including growth) in the new calendar year
  • Can be used for short-term savings, mid-long term, and estate planning
  • Can name spouse as successor owner, and beneficiaries for estate planning
  • Withdrawals do not generate a tax slips; drawing money out does not impact income-tested benefits
  • You must be 18 years old in order to open a TFSA, and can contribute and withdraw based on the plan rules for your lifetime
  • Can invest using many of the same types of investments as within an RRSP or Non-Registered account
  • You might be required to pay non-resident withholding tax on US situated investments
  • There is no need at any time to convert your TFSA to an income plan, it can be held as-is until your death if desired

 

RRSP (Registered Retirement Savings Plan):

  • Deduction provided against T4 earnings; suitable if you are earning employment income, not dividends
  • Contribution room is limited to 18% of previous years’ earned income, less adjustments for pension contributions, up to a maximum specified by CRA each year. Accumulates if you don’t use it
  • Access available through the Home Buyers Plan or Lifelong Learning Plan without immediate tax consequences
  • Naming beneficiaries on an RRSP other than your spouse can have unintended tax consequences and it’s important to speak with your Financial Planner, Accountant, and Lawyer to determine your best course of action
  • Withdrawals are taxed as ordinary income
  • On death, an RRSP may be eligible for a “spousal rollover”, shifting taxation of the RRSP to the death of the recipient spouse
  • When withdrawing from RRSP assets once retired, most individuals are in a lower tax-bracket than during their working years which could result in favourable tax outcomes
  • Depending on your situation, a spousal RRSP could be used to accomplish long-term income splitting
  • You must convert your RRSP to a RRIF (Registered Retirement Income Fund) by age 71, and you must begin to withdraw a CRA mandated minimum at age 72

 

Both TFSA & RRSP Accounts:

  • You can’t deduct interest costs related to borrowing to invest in either a TFSA or RRSP
  • You can’t deduct investment management fees in either a TFSA or RRSP
  • You can’t claim a capital loss in either a TFSA or RRSP

 

Please reach out to us for further information regarding these accounts, or if you have a specific question pertaining to your individual situation.

IT’S OUR 20TH ANNIVERSARY

IT’S OUR 20TH ANNIVERSARY

We are honoured to announce this May 2021 marks Blackburn Davis Financial’s 20th Anniversary.

Thank you sincerely to our clients for the support and trust you have placed in us over these many years. It is an honour to provide financial guidance to our clients and we are grateful for the chance to do so every day. We have enjoyed the privilege of sharing many important moments in our clients’ lives and we look forward to the opportunity to continue to do so.

Under normal circumstances, we would have much preferred to celebrate this occasion with our clients by hosting an in-person event. In lieu of this, we have chosen to donate our event budget to charity. We have estimated a budget of $10,000 and have selected six charitable organizations across Canada. These include YESS – Youth Empowerment and Support Services, The United Way of Canada, The Canadian Mental Health Association, Special Olympics Canada, Women’s Shelters Canada, and The Edmonton Food Bank

Thank you once again for your continued support over the years. We look forward to another 20+ years!

John Davis, Stephen MacDonald, and Kelley Doerksen