Knowledge that will pay off in retirement

Understanding your pension plan3

“The beginning ofknowledge is the discovery of somethingwe do not understand”

FRANK HERBERT

LIFE PLANNING REPORT

Helping you sort it all out

The ways you save, the choices you make about your pension plans and registered and non-registered investments, and the steps you take to protect your assets – all play a vital role in generating the retirementincome you expect.

We can help you understand all your sources of retirement income and builda plan focused on your retirement dreams, so there will be no surprises.

™Trademark owned by IGM Financial Inc. and licensed to its subsidiary corporations. Written and published by Investors Group as a general source of information only. It is not intended as a solicitation tobuy or sell specific investments, nor is it intended to provide tax, legal or investment advice. Readers should seek adviceon their specific circumstances from an Investors Group Consultant. Commissions, fees and expenses may be associated with mutual fund investments. Read the prospectus before investing. Mutual funds are not guaranteed, values change frequently and past performance may not be repeated.Insurance products and services distributed through I.G. Insurance Services Inc. (in Québec, a Financial Services Firm).Insurance license sponsored by The Great-West Life Assurance Company (outside of Québec).

"Understanding your pension plan: Knowledge that will pay off in retirement" © Investors Group Inc. 2012 MP1372 (06/2012)

THE PENSION INCOME-SPLITTING RULES AND YOU

Income splitting is an effective way to reduce a couple’s overall tax bill byshifting income from the higher-earning spouse to the lower-earning spouse.

Retired Canadians can split up to one-half of their eligible pension income(income that qualifies for the pension income credit) with their spouses or common-law partners (subject to certain limits). This not only has thepotential to lower a couple’s tax bill, it may also allow them to avoid Old Age Security and Age Credit clawbacks that are triggered when an individual’s income exceeds a prescribed threshold.

DB plans are the most complicated

If you plan to take early retirement, find out the earliest date your pension plan will allow this andassess the financial impacts. Ask about when youcould receive an unreduced pension and whether your pension plan includes a “bridging” benefit to provide slightly higher benefits until you reach age 65 when CPP benefits will kick in (when your pension amount will be reduced accordingly). Retiring at age 65 (usually normal retirement age) will normally provide a pension that pays you a fixed, guaranteed income, usually monthly, for the rest of your life, and a reduced pension for your surviving spouse.

Your DB plan may have a portability feature that allows you to transfer your accumulated benefits into a locked-in, personally-directed plan – a LIF, LRIF or PRIF (in some provinces). Make the decision totransfer to a locked-in account with caution, because it could result in the loss of employer benefits likeextended health care, dental care or pension increasesthat offset inflation.

With a Group RRSP or DPSP, your choices are the same as for your personal RRSP: withdraw the entire investment in cash (fully taxable) or transfer it to a Registered Retirement Income Fund (RRIF) or an annuity.

DC plans allow you to take the accumulated cash value as a lump sum and purchase a life annuity. In most Canadian provinces, pension legislationrequires that if you are married, you must purchase a joint and last survivor annuity unless your spouseagrees in writing to waive this right. You can alsochoose to receive pension income directly from theplan or transfer the accumulated value to a LIF, LRIF or in some provinces, a PRIF and obtain your income from the registered fund.

LOCKED-IN PLANS – WHAT YOU NEED TO KNOW

Locked-in Retirement Accounts (LIRAs) are a type of RRSP account set up to receive locked-in fundsfrom your registered pension plan. Before the funds from a LIRA can be withdrawn, they must first be transferred to a LIF, LRIF (prior to age 71) or a life annuity.

Life Income Funds (LIFs) and Locked-in RetirementIncome Funds (LRIFs) are similar to RegisteredRetirement Income Funds (RRIFs) in that you’rerequired to withdraw a minimum amount each year,which are capped within a certain income range bypension legislation. You decide what to withdrawwithin that range.

With any locked-in account, you will be required to continue managing the investments – a task that we can help simplify.

Some provinces have introduced “unlocking” featuresthat may provide more flexibility in the use of fundsfrom locked-in plans.

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It pays to understand your employer-sponsored pension plan

It’s easy to see why there is so much confusion about company pension plans. Employer-sponsoredpension plans are as varied as the companies thatoffer them, with numerous choices and options – and lots of puzzling terms like “vesting” and “flexbenefits.” And company pension plans are so automatic, it’s easy to ignore them until you need the income... but by then, it may be too late.

Understanding your pension plan now can help youavoid surprises later, for example, if your pensionincome falls short of funding the retirement you’vedreamt about. So let us help you – beginning right now.

Pension plans – what are they?

There are two basic types of registered employer-sponsored pension plans, regulated by government:

Defined Benefit (DB) pension plans “define” or guaranteea specific pension amount paid to you regularly fromwhen you retire for the rest of your life. The amountof your DB pension benefit is set according to your age,length of service and your salary. (The benefit may ormay not be indexed to increases in the cost of living).Over 85 per cent of all Canadians enrolled in a pensionplan are in a defined benefit plan.

Some DB pension plans include a “flex” feature thatallows you to make additional voluntary contributionsto the plan. When you retire, the value of your flexaccount can be used to purchase additional benefitssuch as a cost of living increase, a bridging featurethat provides higher income prior to the receipt ofCPP/QPP and OAS benefits, or an unreduced pensionfor early retirement.

Defined Contribution (DC) pension plans, also known as money purchase plans, do not guarantee the amount of future benefits. Instead, DC retirementincome depends on accumulated contributions and the investment returns earned by these contributions.

With a DC plan, your contributions are combinedwith your employer’s contributions, plus the invest-ment earnings on these contributions, to purchase a life annuity contract that pays you retirementincome. With most DC plans, the accumulatedamount of your pension benefits can be transferred to a locked-in plan such as a Locked-in RetirementAccount (LIRA), a Life Income Fund (LIF) or, in some provinces, into a Locked-in RetirementIncome Fund (LRIF) or a Prescribed RetirementIncome Fund (PRIF).

Your employer may offer other plans to help you save for retirement

In Group Registered Retirement Savings Plans(RRSPs), regular contributions are deducted from your employment income. It’s important to remember that the total contributions into yourGroup RRSP, plus other personal RRSPs, cannotexceed your personal annual maximum contributionlimit as set by the Income Tax Act (Canada).

Deferred Profit Sharing Plans (DPSPs) are funded solely by your employer and do not have the samerules as registered pension plans. With a DPSP, the size of your retirement benefit depends on how well the investment performs over time.

If you’re like many Canadians, your employer-sponsored pension plan will be one of your most

important sources of retirement income. Knowing how it works will help ensure your finances won’t

stand in the way of your retirement dreams.

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What decisions do I have to make when I join a plan?

When you have the opportunity to join an employer-sponsored pension plan, you will be given an employeebooklet that provides details. Be sure to read the bookletright away. You will also go through an applicationprocess that requires detailed information about yourself and your beneficiaries. Your employer or theprovider of the pension plan can assist you throughthis process. Here are some facts you need to know:

3 Every type of pension plan, except a Group RRSP,requires an employer contribution.

3 In both DB and DC plans, the amount of your contribution is predetermined, usually based on a percentage of your salary.

3 With a Group RRSP, you often have the choiceabout how much you contribute.

3 DPSPs are totally funded by the employer and are often accompanied by the offer of a GroupRRSP for your personal contributions.

3 Every type of plan, except a Group RRSP, will createa pension adjustment on your yearly tax return thatreduces your personal RRSP contribution limit forthe next tax year.

3 In general, benefits from a DB or DC pension plan cannot be accessed until you leave youremployer. The assets cannot be seized or attached by creditors.

3 With the exception of a DB plan, you may also be required to choose your pension plan’s invest-ments. This is a very important decision that youshould talk to us about, as it could directly affectthe amount of your benefits.

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What happens if I leave the employer?

When you leave, you must make a decision about what to do with yourpension plan benefits. You will receive all the money you contributed to the pension plan plus investment earnings. Unless you are “vested”you can take this amount as cash (which is fully taxable) or transfer it ona tax-deferred basis to an RRSP. Provincial legislation establishes exactlywhen you are vested and become entitled to the money contributed toyour pension plan by your employer. Once you are vested, provinciallegislation requires that the money in your plan – your contributions,your employer’s contributions and all investment earnings – is trans-ferred to a locked-in account such as a LIRA, LIF or, in some provinces,an LRIF or PRIF.

Members of a DB plan that qualify for early retirement benefits (usually at age 55 or a combination of age and years of service) may have no choicebut to receive benefits from the pension plan – even if they leave thecompany before the plan’s retirement date.

As a member of a Group RRSP or DPSP, you can take your benefits in cash (fully taxable) or transfer these benefits to a tax-deferred RRSP.Normally, you must be a member of a DPSP for two years to becomefully vested and thus eligible to receive this benefit.

What are your retirement options?

You would think it’s a simple matter to just retire and have your pensionbenefit income roll in, but it can be much more complicated than that.For example, when and how you elect to receive your pension will havea direct impact on your income.

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