Advisors who are building a retirement savings strategy for their clients first need to determine how much they can expect from government and workplace pensions.baona/iStockPhoto / Getty Images
This article is part of a new Globe Advisor series, Pensions Unpacked, exploring how workplace pensions fit into retirement strategies, and the technical details and decisions that come with the plans.
Canadians who take advantage of employer-sponsored pension plans are generally a step ahead in their retirement planning compared with those who don’t have a workplace pension plan or choose not to participate in one.
However, those with workplace pensions generally still need to save personally – via RRSPs, TFSAs and non-registered accounts – to meet their retirement income target.
“The question becomes, ‘Where do I save and how much do I save?’” says Aurele Courcelles, assistant vice-president, tax and wealth management, at IG Wealth Management in Winnipeg.
Advisors who are building a retirement savings strategy for their clients first need to determine how much their clients can expect from government plans – the Canada Pension Plan and Old Age Security (OAS) – and then from any workplace pension plans.
Janine Guenther, portfolio manager and senior family wealth advisor with Bellwether Family Wealth in Vancouver, says even if a client isn’t sure how long they’ll be a member of a pension plan, they’ll still benefit from the growth of the plan – and often from employers matching contributions – over their lifetime if they join.
“It doesn’t matter that you are changing employers or just starting out, [joining the pension plan] is the first thing you [should] do whenever you’re eligible,” she says.
In addition, when clients participate in a workplace pension plan, the employer deducts contributions from income, which reduces the client’s taxes payable at source. That means they don’t “have to wait for a [tax] refund,” she says.
Advisors will want to determine what kind of pension plan a client has: a defined-contribution (DC) or group RRSP plan, in which the employee assumes the investment risk, or a defined-benefit (DB) plan, in which the employer does.
If it’s a DC plan, the advisor may offer advice on choosing from available investment options within the plan. With a DB plan, the advisor will want to determine the plan’s pension formula and whether it’s indexed to inflation, Mr. Courcelles says.
“If [clients are] planning on retiring at 55, hope to live for 40 years and [their] pension is not indexed [to inflation],” he says, they would likely see the purchasing power of their pension erode significantly due to inflation over that time period.
With people changing jobs more frequently, clients may retire having participated in several DB, DC or group RRSPs throughout their careers.
Depending on the type of pension(s) they have, a client leaving an employer may be able to keep their pension in their plan, transfer it to another employer’s plan, transfer it to a locked-in retirement account (LIRA), purchase an annuity, or withdraw the value in cash.
Retirement planning experts say clients should consider consolidating assets held in pensions and LIRAs, particularly if they are small plans or accounts, to the degree that legislation and the rules governing the plan allow.
For example, if the amount of money in a pension plan is less than 20 per cent of the maximum pensionable earnings for the calendar year in which a client’s membership in that pension plan ceased, and the pension plan sponsor allows, they might consider unlocking those assets and transferring them to an RRSP.
Consolidating plans makes it easier for advisors to set and execute a global asset allocation investment mix appropriate for the client, Ms. Guenther says.
Scott Sather, financial planner and founder of Awaken Wealth Management Ltd. in Regina, says for the most part, he advises clients leaving their employer to remain in DB plans, but to transfer DC plans to LIRAs and group RRSPs to personal RRSPs to be managed in partnership with their advisor.
DC plans and group RRSPs typically offer members little access to advice beyond a risk questionnaire, a retirement calculator and a basic menu of asset allocation choices, Mr. Sather says.
“That can lead to [clients] taking on a lot more risk or not enough risk” in their pension plan, he says.
In addition, transferring DC and group RRSP assets out of the plans may represent a reduction in costs if the client can access lower-cost investments than those offered by the provider. Mr. Sather also says his firm charges a lower rate to clients if they hold more assets with the firm.
Clients who save for retirement personally have more flexibility to access their funds should they need them relative to assets held in pension plans, Mr. Sather says.
Retirement savings can be looked at as a pyramid, Mr. Courcelles says, with guaranteed indexed government benefits at the base, workplace pensions above that, and personal retirement savings – including RRSPs, RRIFs, TFSAs and non-registered savings – at the top.
If the amount of guaranteed income a client is expected to receive in retirement from government benefits and pensions is not enough to meet their expected non-discretionary spending needs, they might consider converting a DC plan (after leaving the plan), an RRSP or non-registered savings to an annuity to create a guaranteed stream and a “bigger base” to the pyramid.
Beyond that, clients should maximize contributions to RRSPs and TFSAs to take advantage of the tax sheltering within those vehicles to build retirement savings.
However, if they can’t contribute to both, they should prioritize the RRSP in high-earning years, relative to their expected income in retirement, to take advantage of the tax deduction. If they believe they’ll be in a higher tax bracket in retirement than they’re in currently, contributions to the TFSA should be prioritized.
Clients should also keep in mind that mandatory minimum withdrawals from RRIFs and pension plans may result in the clawing back of OAS benefits.
“Even if you do have RRSP room, and you’ve been a fabulous saver all your life, you shouldn’t be [contributing] more money [to your RRSP] if it looks like you’re going to have that OAS clawed back instantaneously when you [convert your RRSP to a RRIF],” Ms. Guenther says.
Financial planning software that factors in effective tax rates can help advisors and clients keep on track with retirement planning.
“You can run a few scenarios on your own that just give you the confidence and the peace of mind that you’re doing the right thing,” she says.