Introductions to Pensions SFL Pension Conference February 26, 27, 28, 2014 Regina, Saskatchewan 1
Think of pensions as a three legged stool each leg providing stability in our retirement 2
The first leg of the stool is OAS/GIS 3
Old Age Security (OAS) The advantage of OAS is it is a universal plan accessible to all citizens of Canada. The disadvantage is the plan is limited in providing a viable income To compliment low income seniors with limited funds there are the following: Guaranteed Income Supplement (GIS) Allowance (Spousal) 4
Old Age Security (OAS) Guarantee Income Supplement (GIS) OAS Is to replace 15% of the average wage Paid to 95% of seniors through federal revenue GIS Provides additional money to low-income seniors 5
Old Age Security (OAS) Old Age Security is a monthly payment available to most Canadians. You must apply for the benefits. You should apply for OAS six months before you turn 65 4.5 million pensioners receive OAS 6
To be eligible for OAS People living in Canada: Must be 65 years of age or older Must live in Canada and be a Canadian citizen or a legal resident at the time approval of your pension application. Must have lived in Canada at least 10 years after turning 18. To obtain full benefit you must have lived in Canada at least 40 years between the age of 18 and 65. 7
To be eligible for OAS People living outside Canada: Must be 65 years of age or older Must have been a Canadian citizen or legal resident of Canada the day before you left Canada. Must have lived in Canada for at least 20 years after turning 18. For seniors living outside of Canada longer than six months seniors need to know the requirements to maintain the benefit. 8
Benefits of OAS Universal benefit for all Canadian seniors Do not have to work to be eligible for OAS. Benefits are payable for your lifetime. Cost of living increases are measured every three months. 9
Disadvantage of OAS It is taxable income. It is a low benefit. You have to apply for OAS. Application process is complicated. Seniors earning over $71,592 are not eligible for the full benefit. OAS is eliminated if your income is over $115,716 per person per year. 10
Guaranteed Income Supplement (GIS) Additional monthly benefit for very poor OAS pensioners. Based on income Have to apply for the benefit and reapply annually by filing income tax return. 1.6 million Canadians or 35% qualify for GIS. 11
Advantage of GIS Financial assistance for very low income pensioners. Cost of living is measured every three months The benefit is not considered taxable income 12
Disadvantage of GIS The benefit is limited to very low income pensioners. Application process is complicated and application is annually. 13
SPOUSAL Allowance Monthly benefit to poor seniors between the age of 60 and 64 who are spouses of OAS pensioners. Bridges the gap until they turn 65. Based on combined annual income of the couple from previous year. 14
Advantage to Allowance Financial assistance for very low income pensioners. Cost of living is measured every three months The benefit is not considered taxable income. 15
Disadvantage of a Allowance The benefit is limited to very low income pensioners. Application process is complicated and application is annually. There is no further assistance for single pensioners. 16
Average OAS Benefit Payment Rates Type of Benefit Recipient Average Monthly Benefit (Sept/10) Maximum Monthly Benefit Maximum Annual Income OAS All recipients $490.47 $551.54 $115,716 GIS Single person $452.04 $747.86 $16,728 Spouse of pensioner Spouse of non pensioner Spouse of Allowance recipients $286.53 $495.89 $22,080 $431.73 $747.86 $40,080 $376.15 $495.89 $40,080 Allowance All recipients $390.15 $1,047.43 $30,912 Allowance for the survivor All recipients $575.01 $1,172.65 $22,512 17
Amendments to OAS/GIS Age of eligibility will gradually increase from 65 to 67 over six years, starting in April, 2023. The age of eligibility for the Allowance and Allowance for the Survivor will also gradually increase from 60 to 62. Effective July, 2013, a voluntary deferral of the OAS pension allows you to delay receipt of you OAS pension up to 60 months in exchange for a higher monthly amount. 18
Amendments to OAS/GIS An automatic enrollment process will eliminate the need for many seniors to apply for the OAS pension. This will be phased in gradually starting in April, 2013. 19
Second leg of the stool is Canada Pension Plan 20
Canada and Quebec Pension CPP/QPP To replace the 25% of the average wage. Paid up to the Yearly Maximum Pensionable Earnings (YMPE) 2014 max = $1,038.33 2013 avg = $594.19 5.2 million Canadians receive CPP Plan 21
Canada Pension Plan For workers based on earnings. Paid monthly/designed to replace 25% of earnings. Payments are mandatory from the age of 18 to 65 all workers have to contribute. Contributions are paid by both the employee and employer at 4.95% up to the YMPE ($52,500 for 2014). Maximum contribution in 2014 will be $2,425.50. 22
Advantages of CPP Low earnings and child rearing periods are dropped out of calculation. Benefit is indexed to inflation annually. There is a disability benefit. Benefits are payable for your lifetime. Plan is portable. Ability to retire at 60 with a penalty. It is a defined benefit pension plan. 23
Disadvantage of CPP Capped at the YMPE if you are a higher income earner it will not replace 25% of your income. Wage replacement is too low. Application process can be complicated. Penalty for early retirement. Based on earnings and employment. 24
Canada Pension Plan Payment Type of Benefit Rates Average Benefit (Oct, 2013) Maximum monthly benefit (2014) Disability benefit $882.80 $1,236.35 Retirement pension (at age 65) $594.19 $1,038.33 Survivors benefit (under age 65) $402.23 $567.91 Survivors benefit (age 65 and over) $300.99 $623.00 Children of disabled contributors benefit $228.66 $230.72 Children of deceased contributor benefit $228.66 $230.72 Combined survivors & retirement benefit (pension at 65) $771.81 $1,038.33 Combined survivor & disability benefit $998.95 $1,236.35 Death Benefit (one time payment) $2,286.03 $2,500.00 25
Post Retirement Benefit If you work while receiving your CPP, you may increase your retirement income called post retirement benefit, (PRB) To be eligible: - 60 to 70 years of age - working and contributing to CPP - receiving a retirement pension from the CPP or QPP 26
Post Retirement Benefit Once you reach the age of 70, you can no longer contribute toward the PRB Average amount paid in 2013 is $10.19 Maximum payment for 2014 is $25.96. CPP contributions toward the PRB are mandatory for working retirement pension recipients under age 65. After 65 your may choose to contribute to the PRB. 27
Amendments to CPP Changes to CPP are gradually being introduced from 2011 to 2016. CPP amount will decrease by a larger percentage before age 65. CPP amount will increase by a larger percentage after the age of 65. If you are at work under the age of 65 and receiving CPP pension you and your employer will have to make CPP contributions. 28
Amendments to CPP Between the age of 65 and 70 and you are at work while receiving your CPP retirement pension, you can choose to make CPP contributions. This will increase your CPP retirement benefits referred to PRB The number of years of low or zero earnings that are automatically dropped from the calculation of your CPP pension will increase from 15% to 17%. You can receive your CPP early retirement pension without any work interruption. 29
The third leg of the stool is Workplace Pensions and RRSP 30
Workplace Pension Plans For the majority of workers who do have a workplace pension plan there are two different types of pension plans. They are known as Defined Benefit Pension Plan where the pension amount is defined and Defined Contribution Pension Plan (Money Purchase Pension Plan) where only the contribution amount is defined. 31
Defined Benefit Plans (DB) Where the Money Comes From Employer Contributions (Members) PENSION FUND $ Contributions + Investment Earnings = Fund Assets Benefits Retirees 32
Defined Benefit Pension Plans Plan members earn a lifetime monthly pension benefit based on a formula, in most cases based on a percentage of your preretirement earnings and the length of plan membership. May provide inflation protection, early retirement pensions, pensions for part-time workers, disability pensions and survivor benefits. 33
Defined Benefit Pension Plans Benefit cost is funded with employer and employee contributions spread over a long period of time. Administration fees are paid collectively from the plan. The retirement benefit is defined and each member will earn a pension benefit based on the same formula. 34
Defined Benefit Pension Plan Defined benefit or pension income based on: % formula X years of service X average salary. Average salary may be average of best 3, 4 or 5 years of earnings, consecutive or nonconsecutive. Contributions are set to provide monies for the pension fund and are not directly related to pension income. 35
Yearly Maximum Pensionable Earnings YMPE is set by the Federal government and is based on the average industrial wage. ($52,500 in 2014). YMPE affects pensions: 1)Canada Pension Plan contributions cease once the YMPE is reached each year. 2)Defined benefit plans base contributions on before and after YMPE is reached. 3)Defined benefit formula based on YMPE 36
Defined Contribution/ Money Purchase Plans (DC) Employer Contributions Annuity or RRIF (Members) + Interest - Administration costs Retirement Day 37
Defined Contribution Pension Plan Each person assumes risk for the income available at retirement. Set contributions for the plan member and employer are made to each member s individual account. The benefit will depend on the market conditions and interest rates before and at the time of their retirement. 38
Defined Contribution Pension Plan The value of the individual member s account can be substantially reduced by administration fees and the cost to purchase an annuity (monthly pension) at the time of retirement can be high. Plan members risk retiring at the wrong time, if the value of their account has dropped or interests rates are low; they may only be able to buy a minimal monthly pension. Retirement benefit is unpredictable and the risk is solely on the employee. The contribution is defined in this plan. 39
Registered Retire Savings Plans This is considered a savings plan not a pension. Due to life time circumstances some may have to spend the savings prior to retirement as they are assessable to the individual. Tax savings for RRSP contributions up to 18% of income. RRSP max for 2014: $24,270. 40
Workplace Pensions Registered Retirement Saving Plans (RRSP) Workplace Pensions: 38.5% of workers have a workplace pension 80% of these workers are union members 90% are public sector workers 26.6% are nonunionized workers 41
Workplace Pensions Registered Retirement Saving Plans (RRSP) 1/3 of workers have nothing saved for retirement. Those who have a pension plan believe it will be there for retirement That is not the case. 11 million workers do not have a Workplace Pension Plan 42
Workplace Pensions Registered Retirement Saving Plans (RRSP) RRSP: Workers aged 55-64 average savings of $60,000 Geared to the market No longer considered part of a retirement package 43
CLC Retirement Security for All Campaign Double Canada Pension Plan benefits + Increase Guaranteed Income Supplement by 15% to lift seniors out of poverty Guarantee working people a pension when they retire 44
Retirement Savings Financial advisors suggest that we need in retirement: at least 60% - 80% of previous income for retirement. 80/10/5 rule: should have savings of 80% of working income, or have 10 X final year of salary and plan to need 5% withdrawals of your savings each year in retirement. Women are expected to live to 89, Men 87. 45
Retirement Savings On average Canadians may need a retirement monthly income of approximately $3500 per month. Only one third of Canadians contribute to an RRSP. One third withdraw some of those monies. Average Registered Retirement Savings Plan amount is $55,000 ages 55 64. Four in ten Canadians are not saving enough. 46
Target Date Funds Target date funds are defined contribution pension funds that target the investments based on the age of the individual. These funds automatically change the risk levels of investments with age. Riskier investments are used to a greater degree (i.e. equities) for younger members and less risky investments (bonds) for older members. Also known as Life Cycle Funds. 47
Tax Free Savings Accounts A new tax sheltered pension vehicle. Starting in 2009 Canadians can save up to $5,000/year in a Tax Free Savings Account and the investment income is not taxable. Effective January 1, 2013 contribution limit was increased to $5,500. Unused amounts per year can be carried forward. Income earned will not affect Old Age Security and Guaranteed Income Supplement. 48
Pooled Registered Retirement Plans New concept from Ministers of Finance Dec 2010 Similar to Registered Retirement Savings Plan. May be available in workplaces, no mandatory enrollment, or employer contributions. Defined contribution, no pension security. Banks or Investment companies will invest the monies. 49
Saskatchewan Pension Plan Defined contribution plan. No mandatory enrollment. Not related to work time. Low contribution levels, maximum was $600 now maximum contribution will be $2500/yr. Pension income after 30 years predicted to be $668 per month ($100,000 savings). Tax treatment same as with RRSP s. Not a substitute for Canada Pension Plan. 50
Summary Defined Benefit plans reduce the risk of losing pension earnings. Canada Pension Plan improvements would best meet pension needs of Canadians. Lobby to protect and enhance pensions. Include pension provisions/pension text in your collective agreements. Get involved in pension issues. 51