SAULT STE, MARIE ONMAY 15,16 & 17, 2012

DEDICATED TO CULTURALLY

APPROPRIATE TRAINING

Pension PlanningONWAA 2012 Spring Assembly

Prepared by Micheal Nadeau, MBA

Pension Planning

The following material provides a basic understanding of pension terms, tools and benefits available. The list is not exhaustive and there is much more detail available in each topic area. Participants are encouraged to read more on their own and/or speak to a financial planner/consultant.

What is a Pension Plan?

A type of retirement plan where an employer makes contributions toward a pool of funds set aside for an employee's future benefit. The pool of funds is then invested on the employee's behalf, allowing the employee to receive benefits upon retirement. There are two main types of pension plans:

1. defined-benefit plans

2. defined-contribution plans

Pension Planning

In a defined-benefit plan, the employer guarantees that the employee will receive a definite amount of benefit upon retirement, regardless of the performance of the underlying investment pool.

ie, The employee is guaranteed to receive $30,000.00 in pension benefit each year.

Pension Planning

In a defined-contribution plan the employer makes contributions for the employee, but the final amount of benefit received by the employee depends on the investment's performance.

ie. The employer contributes 8% of the employee gross wages towards to a retirement investment plan. Upon retirement the total retirement fund is varied and depends upon the investment’s rate of return (not guaranteed).

Canada Pension Plan

The Canada Pension Plan was established in 1966 to provide a basic benefit package for retirees. If the recipient dies, survivors receive the plan's provided benefits. 

On reserve, status employees may or may not be contributing to CPP. Each employer is different.

If offered, CPP is co-funded funded between an employee and the employer.

Pension Planning

Taking your retirement pension before age 65

If you take your CPP retirement pension before you are 65, it is reduced by 0.5% for each month that you are under 65 years old. For example, if you want your pension to begin the month after your 60th birthday, your retirement pension would be reduced by 30% (0.5% x 60 months).

Pension Planning

Taking your retirement pension after age 65

Your CPP retirement pension is increased by 0.5% for each month after your 65th birthday that you delay taking the pension. The maximum increase is 30%. For example, if you want your pension to begin the month after your 67th birthday, your retirement pension would be increased by 12% (0.5% x 24 months).

Pension Planning

Canada Pension Plan Payment Amounts

Type of Benefit Maximum Amount 2012)

Retirements (at age 65) $986.67

Disability $1,185.50

Death (one time payment) $2,500.00

Pension Planning

Other Retirement Benefits.Type of Benefit

Maximum Amount (2012)

Income Level Cut-off

Income Level cut-off for top-ups

Old Age Security (OAS)

$540.12 $112,772 $69,562

Guaranteed Income Supplement (GIS)

Single $732.36 $16,368 $4,448

Spouse/common law partner who:

Does not receive OAS

$732.36 $39,264 $8,896

Receives OAS $485.61 $21,648 $7,456

Stock Market

A stock market or equity market is a public entity for the trading of company stock (shares) at an agreed price. Stocks are listed and traded on stock exchanges which specialize in bringing buyers and sellers together. ieNew York Stock Exchange (NYSE) Toronto Stock Exchange (TSX)• .

RRSP

A legal trust registered with the Canada Revenue Agency and used to save for retirement. RRSP contributions are tax deductible and taxes are deferred until the money is withdrawn. An RRSP can contain stocks, bonds, mutual funds, GICs, etc.

RRSP

RRSPs have two main tax advantages:1. Contributors deduct contributions

against their income. For example, if a contributor's tax rate is 40%, every $100 he or she invests in an RRSP will save that person $40 in taxes, up to his or her contribution limit. This only is applicable to non status people and status members working off reserve.

RRSP

Advantages (cont’)

2. The growth of RRSP investments is also tax sheltered. Unlike non-RRSP investments returns are exempt from any capital-gains tax, dividend tax or income tax. This means that investments under RRSPs compound at a pretax rate.

Note: Money earned through an RRSP investment is subject to income tax when withdrawn from the investment upon retirement, as the money was invested and earned off reserve.

RRSP

Most RRSP’s are invested in mutual funds. Income earned through an RRSP is taxable, as the money was invested in the stock market, which operates off reserve.

WHAT is a mutual fund?

Mutual Funds

A mutual fund is a type of professionally-managed investment fund that pools money from many investors to purchase securities (stocks, bonds, etc.)

How do mutual funds work?

Mutual FundsWhen you put your money in a mutual fund along with many other people, it creates a large pool of money that can be invested. The company that runs the mutual fund puts a professional in charge of investing the money. This person is the fund manager.

The fund manager decides where to invest the money and manages it for all of the investors, so you don't have to decide what to do. The manager also decides when to buy and sell investments for the mutual fund.

Tax Free Savings

A Tax-Free Savings Account (TFSA) is a registered general-purpose savings instrument that allows Canadians to earn tax-free investment income.

TFSAHow a Tax-Free Savings Account Works

Canadian residents age 18 or older can contribute up to $5,000 annually to a TFSA.

Investment income earned in a TFSA is tax-free.

Withdrawals from a TFSA are tax-free.

Unused TFSA contribution room is carried forward and accumulates in future years.

TFSA (cont’)

Choose from a wide range of investment options such as mutual funds, stocks, Guaranteed Investment Certificates (GICs) and bonds.

Neither income earned within a TFSA nor withdrawals from it affect eligibility for federal income-tested benefits and credits, such as Old Age Security, the Guaranteed Income Supplement, and the Canada Child Tax Benefit.

  TFSA assets can generally be transferred to a spouse or

common-law partner upon death.

Credit Rating

One of the most important gifts you can give yourself is a solid credit rating. A good credit rating allows you to borrow money – credit cards, trucks, boats, homes, etc. The better your credit score the lower your interest rate (cost of borrowing) will be. Thus, a good credit rating provides options and opportunities and will save you money.

Credit Rating

Code Translation

R0 Too new to rate; approved but not used.

R1 Pays (or paid) within 30 days of payment due date or not over one payment past due.

R2 Pays (or paid) in more than 30 days from payment due date, but not more than 60 days, or not more than two payments past due.

R3 Pays (or paid) in more than 60 days from payment due date, but not more than 90 days, or not more than three payments past due.

R4 Pays (or paid) in more than 90 days from payment due date, but not more than 120 days, or four payments past due Pays (or paid) in more than 90 days from payment due date, but not more than 120 days, or four payments past due.

Credit rating (cont’)

Code Translation

R5 Account is at least 120 days overdue, but is not yet rated "9."

R6 This rating does not exist.

R7 Making regular payments through a special arrangement to settle your debts.

R8Repossession (voluntary or involuntary return of merchandise).

R9 Bad debt; placed for collection; moved without giving a new address or bankruptcy.

Pension Planning

Financial planning is very important. Without a solid plan, retirement will be uncertain and could be difficult.