Retirement Planning
Retirement Planning
Retirement is an important part of our lives. Financial security in retirement doesn't just happen – it's part of a comprehensive plan – one that takes a lifetime to build.
At retirement, the total of all contributions – including all related investment earnings – will be used to purchase an annuity or a Life Income Fund (LIF) from the financial institution of individual choice. If an immediate income is not needed, a third alternative is to roll pension funds into a locked-in RRSP when you retire.
Retirement Planning Details
- Life Only Annuity
- Joint and Survivor Annuity
- Annuity with a Guarantee Period
- Integrated Annuities
- Indexed Annuities
- Impaired Health Annuities
- Life Income Funds (LIF's)
- Selecting an Option
- Government Benefits
- Canada Pension Plan (CPP)
- Old Age Security (OAS )
While there are many variations, annuities are designed to provide individuals with a regular income on a guaranteed basis. The income is not impacted by changes in the investment markets, and most annuities guarantee a continuing income for as long as you live. Some of the most popular annuity options are described below:
Life Only Annuity: Income payments are made as long as you live. This option provides the highest initial monthly income payment. However, there are no continuing payments after death (note that a spousal waiver must be signed for this option).
Joint and Survivor Annuity: Annuity income under this option is based on two lives, usually a husband and wife. Income payments continue to be made to the survivor after the death of one party. These payments will continue at either the same or a reduced amount for the rest of the survivor's life. Because of the survivor benefit that is provided, the initial income is less than under the Life Only Annuity. A very common annuity selected by married individuals, is a Joint and Survivor Annuity with 60% of the initial income continuing after the member's death.
Annuity with a Guarantee Period: This is a feature which can be selected at the time of purchase, to either of the above two annuities. The guarantee period (for example, 5, 10, or 15 years), assures that annuity payments will continue to be made after your death (and your spouse's death in the case of Joint and Survivor Annuities) for the remainder of the guarantee period selected.
Indexed Annuities: These provide for an income which increases by a specified percentage each year. The initial income amount is decreased by approximately 7% for every 1% of indexing which is selected. For example, if an annuity which provides 3% indexing is chosen, the initial income would be about 21% less than a similar non-indexed annuity. After about 7 years, the income will have increased to a higher amount than the non-indexed annuity would provide. This feature can be important in offsetting the long-term impact of inflation.
Integrated Annuities: Annuity income can be integrated with Old Age Security and the Canada Pension. Up to age 65 the insurance company pays an increased income amount. At 65 the amount paid by the insurance company reduces when it is anticipated that benefits from Old Age Security and Canada Pension Plan will start.
Impaired Health Annuities: While not common, some insurance companies will provide a higher than normal income for individuals with seriously impaired health, based on the assumption that life expectancy is shorter than normal. To establish the degree of impairment, a medical certificate or examination is required at the time the annuity is applied for.
A LIF allows a significant degree of control to be maintained over how funds are invested, and how much individuals draws as an income each year. Many financial institutions offer a full range of mutual fund and guaranteed investment options. It is even possible to establish a “Self-Directed LIF” and invest in specific securities (stocks and bonds for example).
A LIF allows the individual to select the level of income which can be withdrawn each year, subject to a minimum and a maximum. This flexibility can allow increased amount withdrawals in years when individual needs are greater. In other years withdrawals can be decreased resulting in more funds being available for future years.
The minimum and maximum income amounts are based on your age. For example, if at age 65 (at the start of the year), the minimum annual income is 4% of the LIF fund balance at the start of the year; the maximum annual income varies with interest rates but is in the range of 7.5%. By age 75 (at the start of the year), the minimum annual income is 7.85% and the maximum is in the range of 9.7%.
A LIF may be converted to a life annuity whenever you choose, and in fact must be converted by the end of the year that you turn age 80.
In choosing between a life annuity and a LIF, the main difference is between guarantees and flexibility. The annuity provides guarantees both with respect to investment returns and that you won't outlive your money. The LIF provides flexibility both to the level of income and how the funds are invested.
Because a LIF can be converted to a life annuity at a later time, this option can provide an immediate income while allowing postponement of purchasing an annuity. This can be an attractive option if anticipating that interest rates will increase, making annuities more attractive; note that this strategy can have a negative effect if interest rates decline.
If choosing an annuity, the option chosen should be appropriate to the income needs of both spouses and any remaining dependents. The estimated income from all sources should be compared to the income needs (both during the joint lifetime of a married couple and in the event of either death). A wise selection for many married retirees will be a Joint and Last Survivor annuity with a 60% or 70% survivor benefit. Indexing can also provide valuable protection from inflation.
If choosing an LIF, consider how the funds are to be invested. Review the information in the section entitled "Selecting Your Investment Options".
Life annuities are currently available in Canada only from insurance companies. LIFs are available from banks, trust companies, credit unions, insurance companies, as well from many brokers on a self-administered basis. Rates vary so make sure to shop around.
At retirement, you may be entitled to receive pension benefits under the Canada/Quebec Pension Plan as well as the Old Age Security Act in addition to those provided under the University's Pension Plan.
CPP/QPP contributions, based on individual earnings, are paid not only by the employee but by the University as well. OAS benefits are funded by general taxation.
Apply for government benefits at least three months before they are to start being paid.
CPP retirement benefits are based on individual contributory earnings history. A projection of benefits can be requested from CPP.
Individuals may start drawing CPP benefits as early as age 60 subject to reductions.
The pension payments under the Canada Pension Plan are currently indexed annually to the Consumer Price Index (CPI).
To learn more of the Canada/Quebec Pension Plan, click on the following link:
http://www.servicecanada.gc.ca/eng/isp/cpp/cpptoc.shtml
Qualification for OAS benefits is based only on a residency requirement. Benefits start at age 65 with no option to start benefits earlier. Depending on income while in receipt of Old Age Security, some or all of Old Age Security payments may be clawed back. For more information, contact the HRDC office nearest you.
Nova Scotia Regional Office
99 Wyse Road
Dartmouth, NS, B2Y 4B9
Metropolitan Place, 5th Floor
Tel: 429-2988
Fax: 426-4724
OAS payments are indexed to the CPI, and are adjusted quarterly.
To learn more of Old Age Security, click the following link:
http://www.servicecanada.gc.ca/eng/isp/oas/oastoc.shtml
Subject to an income test, Spouse's Allowance and Guaranteed Income Supplement may also be available.