Pension News INFORMATION FOR RETIRED TEACHERS AND THEIR SURVIVORS WINTER 2011 What s behind your CPP reduction? We often speak about your CPP reduction, or the amount by which your Teachers pension will be reduced at age 65. But how do we determine the amount? As you know, your pension is integrated with the Canada Pension Plan (CPP). Contributions to and benefits from Teachers take into account your participation in CPP. When you turn 65, or when you start to receive a CPP disability pension, your Teachers pension will be reduced. For most pensioners, the reduction is approximately equal to two-thirds of your unreduced CPP retirement pension. This amount is based on a formula, not what you will receive from CPP. The question is, what is this formula, and how do we determine the amount of the reduction? Continued on page 2 Inside this issue CPP is changing 3 It s tax time 4 Vote for a new Pension News look 6 News briefs 8
2 Pension News Winter 2011 What s behind your CPP reduction? Continued from page 1 The equation is fairly simple. 1. We determine your CPP reduction at the time of your retirement by using the following formula: CPP reduction factor applicable for the year you turn 65 YMPE (Year s X CPP credit X Maximum Pensionable Earnings) average = or best-five salary CPP reduction (.0045) (years of service in the Teachers plan during which you also contributed to the CPP) (five-year average YMPE based on when you last contributed to the Teachers plan or your best-five average salary, whichever is lower) 2. We then adjust the CPP reduction for inflation. Let s look at an example: Sylvia is a retired teacher who receives an annual pension of $46,000. She turns 65 in 2011. Sylvia has 30 years of credit and started a pension of $40,000 at age 57. The five-year average YMPE ($38,460) based on when she last worked as a teacher (2003) is less than the average of her best-five average salary.* Step 1: What is Sylvia s CPP reduction in dollars at the time of her retirement? CPP factor CPP credit (years) YMPE average ($) CPP reduction ($).0045 x 30 x $38,460 = $5,192 And so, when Sylvia turns 65 and begins receiving her CPP pension, her Teachers pension will be reduced by $5,971. Step 2: What is the CPP reduction, adjusted for inflation, when she turns 65? A. What percentage of her original pension does the reduction represent? CPP reduction ($) Original pension ($) CPP reduction (%) $5,192 $40,000 = 12.98% B. What is the CPP reduction applied to Sylvia s current pension? CPP reduction (%) Current pension ($) Pension reduction at age 65 ($) 12.98% x $46,000 = $5,971 *example assumes no further pension reductions after retirement such as a survivor benefit for a new spouse The CPP reduction factor is determined by the OTF and Ontario government, the plan s partners. The most recent change occurred in 2001, when it was reduced to.0045.
Pension News Winter 2011 3 What s new with the Canada Pension Plan? The Canada Pension Plan (CPP) is changing. The changes which were introduced in January 2011 will be implemented gradually over the next five years. If you were receiving a CPP retirement pension before Jan. 1, 2011 and no longer work, these new rules will not apply to you. While these changes won t affect your Teachers pension, they will have an impact on your overall retirement income. It s important that you understand what the changes are, when they take effect and how they may influence your plans for taking CPP. The decision as to when to collect your CPP retirement pension can be a complicated one, so we encourage you to seek the advice of a good financial advisor. For more information, contact Service Canada at 1.800.277.9914 or visit its website at www.servicecanada.gc.ca. In the meantime, here s what you can expect: 1. New rules allow for more CPP contribution Today, if you are working and collecting a CPP retirement pension, you cannot contribute to CPP, no matter what your age. Starting in 2012, if you are under 65, working and receiving a CPP retirement pension, you will now have to make mandatory contributions to CPP. If you are over 65, working and receiving a CPP retirement pension, additional CPP contributions are voluntary. 2. You can continually work and collect CPP Under current regulations, if you are under age 65, you must have substantially ceased working for at least two months before being allowed to collect CPP. Beginning in 2012, you can collect a CPP retirement pension at any time after age 60, even if you are still employed. 3. Increase in drop out years Currently, when calculating your CPP retirement benefit, you can drop out up to 15 per cent of your lowest-earning years from your CPP contributory period (up to seven years). By doing this, you will increase your CPP. The new rules will see this number increased to 16 per cent (up to a maximum of 7.5 years) in 2012 and 17 per cent (up to a maximum of eight years) in 2014. 4. Even lower CPP if taken early Currently, a CPP retirement pension is reduced 0.5 per cent for every month you are under age 65 when you begin to receive it (as early as age 60). Starting in 2012, this amount will be increased incrementally so that by 2016, the reduction will be 0.6 per cent per month. 5. Even higher CPP if taken later In 2010, if you were over 65 and began receiving a CPP retirement pension, it would have been increased 0.5 per cent for every month you were over 65 (up to age 70). In January 2011, this amount started to increase so that by 2013, the escalation will be 0.7 per cent per month. 2010 2016 monthly CPP pension adjustments Age CPP pension New pension adjustments per month begins 2010 2011 2012 2013 2014 2015 2016 before 65-0.5% -0.5% -0.52% -0.54% -0.56% -0.58% -0.6% 65 0% 0% 0% 0% 0% 0% 0% after 65 +0.5% +0.57% +0.64% +0.7% +0.7% +0.7% +0.7%
4 Pension News Winter 2011 Five common tax myths, debunked Tax season is here once again. And while you don t need a degree in accounting to prepare for it, it is important to understand the rules and regulations that may affect you. Often pensioners just pay their taxes without thinking about what they can do to improve their tax situation, says Michael McAllister, Director, Client Services. If you just take a few minutes to learn the rules, you may find that you can take some proactive steps that may save tax dollars every year. Here are five common tax myths we often hear from pensioners: Myth #1: Teachers partners the OTF and Ontario government determine the amount of tax that is deducted from my pension. False. The basic deduction we apply is based on the Canada Revenue Agency s (CRA) requirements and the information we have regarding your income. We assume that your Teachers pension is your only source of income and that you only qualify for the Basic Personal Exemption, unless you tell us otherwise by submitting a TD1. Myth #2: Writing a big cheque to the government every year is a given. You don t have to owe the government every April. You can arrange to have more tax deducted from your pension. If you are registered for iaccess Web, the secure member website, you can increase the deduction at any time. Just click on the My Pension tab and go to the Pension Payments page. You can also ask us to deduct more tax by letter or by phone. Myth #3: By law, Teachers cannot reduce the taxes deducted from my pension. The amount of tax that we deduct from your pension can be reduced, but only by claiming additional eligible tax credits. These could apply if you become disabled, turn age 65, support certain dependants or go back to school. Just complete the TD1 and TD1ON (Personal Tax Credits) forms available from our website at www.otpp.com. You can also ask the CRA for permission to reduce the taxes for deductions and tax credits that cannot be claimed on the TD1. These might include large charitable donations, support payments required under a divorce or separation agreement, child care expenses and allowable RRSP contributions. Complete the form Request to Reduce Tax Deductions at Source (T1213), available in the forms and publications section of the CRA website at www.cra-arc.gc.ca. Once your request has been approved, you ll need to forward a copy of the CRA s authorization letter to us. Myth #4: Couples who split a pension income should always split it 50-50. Pension splitting, which allows one pensioner to allocate up to 50 per cent of his or her pension to a spouse, can lead to a reduction in the overall family tax. But the optimal split in pension requires tax software or some old-fashioned trial and error, and a 50 per cent split is not always the best solution. See the article on the opposite page for an example. Myth #5: I need to resubmit my TD1 and TD1ON every year to reflect the government s higher basic personal tax exemption. No, we automatically adjust your tax deductions every year based on the forms we have on file. If you have additional deductions you wish to claim such as new tuition expenses or disability claims you will need to submit a new TD1 or TD1ON form. Note that the T1213 form, in contrast, needs to be submitted to the CRA every year. Effective January 2011, if you are a non-resident and usually fill out an Application by a Non-Resident of Canada for a Reduction in the Amount of Non- Resident Tax Required to be Withheld (NR5), you only have to do so once every five years. A copy of your T4A is available any time at iaccess Web.
Pension News Winter 2011 5 Why 50 per cent income splitting isn t necessarily optimal In 2007, the government announced a tax break that allows Canadian residents to allocate up to 50 per cent of their pension income to their spouse for tax purposes. For most pensioners, this practice makes sense when one spouse earns significantly more than the other. What is the most favourable split for these couples? The answer is not necessarily 50 per cent. The following examples illustrate the importance of doing multiple calculations to determine the optimal amount of pension income to split with your spouse. Each example shows family tax savings that result from splitting: the maximum 50 per cent of eligible income; the amount required to equalize your income and your spouse s income; and the optimal amount required to maximize tax savings. Our examples cover couples under age 65, even though a Teachers pension can be split at any age. Couple 1 Member: $50,000 Teachers pension, no other income Spouse: no income Pension splitting Amount Approximate tax savings* Maximum 50% split $25,000 $1,592 Split to equalize income $25,000 $1,592 Optimal split $14,260 $2,098 Couple 2 Member: $45,000 Teachers pension, no other income Spouse: $12,000 employer pension, no other income Pension splitting Amount Approximate tax savings* Maximum 50% split $22,500 $514 Split to equalize income $16,500 $364 Optimal split $9,000 $604 Couple 3 DON T FORGET: Any portion of your pension paid from the Retirement Compensation Agreement (RCA) is not eligible for income splitting purposes. Member: $35,000 Teachers pension, no other income Spouse: $20,000 employer pension, no other income Pension splitting Amount Approximate tax savings* Maximum 50% split $17,500 -$64 Split to equalize income $7,500 -$300 Optimal split $0 $0 * For the purposes of this example, we have calculated the optimal split for you. To determine your own optimal split will take trial-and-error calculations and/or tax software.
6 Pension News Winter 2011 Your chance to vote for a new Pension News It s a brand new year and the times they are a-changing. We want to make Pension News clearer, more appealing and more relevant than ever before. And so, we present three different Pension News designs. We ve tweaked a colour here and a font there. And we re leaving it up to you to let us know which one you prefer. Visit our website at www.otpp.com or write to us to cast your vote. You ll see the winning style in a future issue of Pension News. VOTE ONLINE Go to www.otpp.com/redesign VOTE BY MAIL Ontario Teachers Pension Plan c/o Member Services Communications Department 5650 Yonge Street Toronto, Ontario M2M 4H5 OPTION 1 OPTION 2 OPTION 3 Not an iaccess Web draw winner? Contest continues throughout 2011 2010 s big winners Congratulations to the following five winners of our demographic information contest: Sandra Lynn M. Linda M. Joan R. Diana S. Thomas O. Mississauga Balderson Lucan Algonquin Highlands North York These pensioners are the lucky recipients of a $100 gift card. They went online to iaccess Web, the secure member website, and made a change to their demographic information. You could be a winner in 2011 Want the chance to put a $100 shop! gift card from Cadillac Fairview in your pocket? Just go online and make a demographic update to your iaccess Web profile by March 31, 2011. One entry per person. One winner will be determined by random draw and contacted by telephone.
Pension News Winter 2011 7 You ASKED Us Q. I m moving again. How do I notify you of my new address? A. If you are registered for iaccess Web, the secure member website, you can update your e-mail and mailing address online. You can even enter a future address and a date for when the switchover occurs. If you change your personal information online before March 31, 2011, you ll be entered into our $100 Cadillac Fairview shop! gift card draw. If you aren t registered, call us at 416.226.2700 or 1.800.668.0105. In addition, let us know if you are moving to another country, as our tax deductions are based on your country of residence. Q. Can I get a list of your investments? I d like to know where my money is being invested. A. A list of our major investments can be found on our website at www.otpp.com, under the Investments tab, as well as in our Annual Report, under the Annual Reporting tab. This list is updated once a year, in April, when our annual performance results are released. Our reporting period is the same as the calendar year, which means our list reflects major investments as of our Dec. 31 year-end. If you re looking for more current information, we announce large investments and transactions as they happen in the Newsroom section of our website. Q. Does the increased value of the Canadian dollar affect the value of Teachers investments? A. As our dollar gets stronger against other currencies, the value of some of our foreign investments can go down when converted back into Canadian dollars. However, this is offset by the fact that we have seen many other currencies, such as the Australian dollar, Swiss franc and Japanese yen, keep pace with or increase in value compared to the Canadian dollar. Teachers holdings are very diversified in terms of asset class and currency. Investment decisions are made with the potential impact of foreign currency fluctuations taken into consideration and exposure to a portfolio of foreign currencies helps to reduce our overall portfolio risk. Q. I ve just been approved for a CPP disability pension. Do I need to let you know? A. Yes, you will have to advise us immediately in order for us to reduce your Teachers pension. We will require a copy of your CPP Notice of Entitlement when it becomes available. You can contact CPP directly at 1.800.277.9914 if you have misplaced your copy. Q. How do you expect pensioners to keep up with the cost of living with a 1.4 per cent inflation increase? A. The inflation increase is intended to help, but not necessarily fully cover, a member s cost-of-living increase. Why? First, every member s spending patterns differ. While 1.4 per cent might be enough for one pensioner, it might be viewed as inadequate by another. Second, the calculation we use compares Statistics Canada s average monthly consumer price index (CPI) for the 12-month period ending in September to the 12-month average a year earlier. The inflation rate used in the media compares the CPI for the current month to the same month a year earlier. In addition, the rate for Canada is used, which does not necessarily reflect the cost of living in Ontario.
8 Pension News Winter 2011 News Briefs Leech receives communications honour In January, President & CEO Jim Leech was honoured with the 2010 CEO Award of Excellence by the Canadian Public Relations Society of Toronto. The award recognizes a CEO who has demonstrated excellence in all aspects of communications, including employee communications, media relations, public and stakeholder relations and community support. You can read his acceptance speech on our website, www.otpp.com. Teachers receives investment award It was happy holidays for the pension plan late last year as the investment team was awarded the aicio s Industry Innovation Award in the $15 billion-plus public pension fund category. The awards, established by publisher Asset International, celebrate asset owners that have delivered long-term and consistent results in the wake of current market uncertainty. Pension News Ontario Teachers Pension Plan 5650 Yonge Street Toronto, Ontario M2M 4H5 Client Services Phone: 416.226.2700 or 1.800.668.0105 Fax: 416.730.7807 or 1.800.949.8208 Email: inquiry@otpp.com Website: www.otpp.com We appreciate your comments about anything you read in Pension News. Please e-mail member_communications@ otpp.com. This newsletter does not create any right to benefits. Your entitlements and those of your survivors are and will be governed by the language of the pension plan text. The information contained in this newsletter is not intended to be relied upon in relation to any particular circumstance. Ce bulletin est disponible également en français. Attend annual meeting on April 7 Want more news about your pension plan? You can attend Teachers annual meeting from 4:45 p.m. to 7:00 p.m., at Arcadian Court, 401 Bay Street, 8th Floor, in downtown Toronto. The event includes a Q&A period and an opportunity to ask a Pension Benefits Specialist about your own pension. To attend the meeting, register online at www.otpp.com by April 1. To submit a question for the meeting, e-mail communications@otpp.com. The most frequently asked questions will be addressed at the meeting and answered on our website. You can also watch the proceedings live, or later at your convenience, at www.otpp.com. Your answer must be in the form of a question Are you one of the estimated nine million people who tune into Jeopardy! every weeknight? If so, you may have been surprised to see your pension plan mentioned on the popular game show. On Nov. 30, 2010, two out of three contestants answered the final challenge correctly: A. In action since 1917, this sports franchise is now largely owned by the Ontario Teachers Pension Plan. Q. Who are the Toronto Maple Leafs? Did you get it right? We sure hope so! Return undeliverable Canadian addresses to: Ontario Teachers Pension Plan 5650 Yonge St. Toronto, ON M2M 4H5 PM# 40062973 ISSN 1180-3282