Pension Income Splitting

Let me preface this by stating that I think Canada should adopt a combined family income model for taxation. In this model spouses could combine their income and then income split on the basis of that. As part of my retirement plan, I hopefully, will be able to use Pension Income Splitting (from T1032, joint election of split pension income).

Pension income splitting has been around for over 10 years. So far no government has tried to curtail the use of this tax avoidance tool. Who can use this powerful tool? Only couples with pension income, or pension-like income vehicles, and typically these couples will have one spouse that has a higher rate of income.


How does Pension income splitting work?

The arithmetic involved is quite simple: I can give up to 1/2 of my entire pension income to my wife and have it taxed at her rate of taxation. While this might raise my wife’s tax bracket, it will lower mine as well. My current estimates show that I might save up to $600 a year by pension income splitting.

The program is quite simple, all I need do is fill in the form T1032 when I submit my taxes. I can then opt out the next year, by not submitting that form in my taxes. Splitting your CPP income with your spouse is much more complicated (but can be done as well).

Pension Splitting

Pension Income Splitting is Bad For Canada?

The C.D. Howe institute has published a report that claims that income splitting will, “… infect your soul, curve your spine, and keep the country from winning the war…” (to paraphrase George Carlin). I am not sure exactly why there is a big hate-on for this program, as you can do similar things if you create a Spousal RRSP (but you have to do that far in advance of your retirement).

The major reason I can take advantage of this program is that my spouse has a small pension. If we both had the same income level, pension income splitting would make no sense.

I am hoping the Liberal government (or future governments) do not put the kibosh on this program, as they did on Combined Family Income.

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Now I’m Fifty Five

Many years ago now, I turned fifty five, and thought I should mention it to everyone. I am now much older, but still not a full-fledged senior citizen.

I can start collecting CPP (at a large discount. It is possible to retire with my pension from work (at a large discount),. There are even discounts at a few stores and restaurants.

Fifty Five
Fifty Five

I have seen the world change dramatically over these years.

When I was a kid:

  • Banks were only open from 10 to 3 PM Monday to Thursday and opened Thursday night 6-8 PM and Fridays were open until 5:00 PM. Oh and there were no ATMs, those only started appearing when I went to University (remember the Johnny Cash Machine). Hence when someone wasn’t working all their hours in the office, the nasty remark you could make was “Sam works Bankers’ Hours“. Now that would mean Sam is working a lot of overtime. You don’t even have to go to the bank any more!
  • I applied for my first Credit Card and was turned down!
  • My first job was as a Paperboy and I collected payment every week, door to door. I delivered telephone books as a summer job.
  • The first few TVs my family owned were Black and White, and the first colour TV we had was leased from Granada.
  • My brother brought home his first computer in 1977 (I think), it was two boards with a 4 Digit display (I think it might have had 2K of memory). Later my Dad bought the family a VIC-20 and we played Pong (and the Sword of Fargoal) and thought it was great.
  • I got paid with an actual Cheque, that I had to take to the bank (which wasn’t open often (remember)).
  • I had to apply (and got turned down once) for a cheque payment card at Loblaws (so I didn’t have to carry cash to pay for my groceries).
  • My first mortgage interest rate was 14% and we locked in for 5 years because that was cheap.
  • I carried a dime around in case I had to make a phone call on a pay phone.
  • At my job when I was on-call I carried a pager, and I had a special device that held 8 quarters in case I had to call into work (on a pay phone).
  • It used to be normal to have someone pump your gas, there were Milkmen who delivered milk to your house, and there was even Mailmen who delivered Mail.
  • Long Distance phone revenues used to be the backbone of the telecomm world, now it is free. Remember waiting to call your mom until after Saturday noon until Sunday at 6 PM (so you got 67% off).
  • Entire technologies have gone by the way side:
    • VHS Video Tape rentals and Blockbuster, 8-track tapes, Audio Cassettes (remember the mixed tape?).
    • The AOL CD Coaster, but remember AOL still exists (and people are still paying for it).
    • The Pet Rock came and went
    • The entire Y2K thing
    • Direct Film, where you could get the film in your camera developed in 24 hours? How about film cameras?
    • Furbees came, went and came back

Yes, the world has changed a great deal in the past 55 years.

OK all you other “end of the Baby Boomers” crowd, what other fun financial things did I miss from yesteryear ?

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My Biggest Purchase Was Not A House

The epiphany about my biggest purchase only hit me a while ago when I was chatting some co-workers and the topic was purchasing houses. Yes, I bought my house last century, so the price was not nearly as high as the prices are these days, but my biggest cash outlay was about 33% more than what I paid for my house.

Biggest Purchase

Now THAT is a big purchase

Just to be clear the biggest purchase was not a house, nor a holiday home (i.e. cottage) or anything like that (and no it was not a car or vehicle), and here is a final hint, it was not something I purchased a little at a time either (although you are heading in the right direction).

If you guessed it has something to do with retirement, you are correct, but I have not put that much money into my RRSP (nor do I have an RRSP that is that large (anymore)).

When I left Nortel I was lucky enough to have been at Nortel long enough, that my pension was actually worth a large amount of money, and thanks to my wife and Michael James I luckily removed my money from the Nortel Pension before Nortel declared bankruptcy. This left me with a very large Locked in Retirement Account (LIRA) and a smaller RRSP, which I then was able to buy into the Federal Civil Service Pension.  When I bought into the pension I paid for all of the pension (with no Government payment into it at all) for the period that I was allowed to transfer from Nortel (it is a program called Pension Buy Back).

This means that even though I have a federal pension, I paid for most of it (or more precisely, my defined benefit pension from Nortel paid for it), and this was my biggest purchase (ever).

The interesting part of the story is that the only reason I was allowed to buy into the Government pension was that I had:

  1. Started working for the government within 2 years of leaving Nortel
  2. Nortel’s pension is an “accredited pension plan” that the Government allows for transfer of funds and time from and into the Government Employees Pension plan.

I was very lucky that I qualified for part (1) of that statement (i.e. joined government within 2 years after being Laid off from Nortel), so again I fall bass ackwards into a good decision.

 

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Are Employer Pensions in Canada Dying ?

Stats Canada published an interesting study of Pensions last week, entitled, “Pension plans in Canada, as of January 1, 2014 “, and in it was the great news that more Canadians (total) have pensions (from 2012 to 2013). (Remember previously I did ask Do you have a Pension?)

Looking at all sectors and all types of pensions 169 more Canadians had Pensions from 2012 to 2013 (no that is not in hundreds of thousands, or thousands, it is 169). For all intent and purpose there were the same number of folks with pensions, however, the types of pensions that they have, has changed a fair amount.

  • There are 20,868 less folks in Defined Benefit Pension Plans
  • There are 6.428 more folks in Defined Contribution Plans
  • There are 14,609 more folks in Hybrid Pension Plans, where Hybrid means, “Other plans include plans having a hybrid, composite, defined benefit / defined contribution or other component.

So what does this really mean? I think the idea of the work related pension is changing (some might say becoming extinct, but maybe not just yet), and most folks (next generation after me) is going to have to take care of their own retirement savings. I was lucky enough to fall into a pension, but unless you work for the government (or a bank) you are unlikely to have a classic pension plan (private sector pension plans are down 0.2%).

This explains why you have some folks (like the Ontario government) that think that folks need to have more retirement savings, and they are going to impose it on you (with the proposed new Ontario Provincial Pension), whether you want it or not.

What is interesting is in the mid-90’s folks at Nortel wanted out of the Pension Plan (a defined benefit program at the time) because it was screwing up their ability to put money in their RRSPs (many thought they weren’t going to stay at Nortel their entire career (and they were right, in hindsight)).

Is the idea of a company pension dead? Opinions, dear reader?

Registered pension plan membership, by sector and type of plan

From this page at Stats Canada

  2012 2013 2012 to 2013 2012 to 2013
number number net change % change
All sectors: Total 6,184,990 6,185,159 169 0.0
Males 3,092,479 3,108,762 16,283 0.5
Females 3,092,511 3,076,397 -16,114 -0.5
Defined benefit plans 4,422,838 4,401,970 -20,868 -0.5
Males 2,053,060 2,044,367 -8,693 -0.4
Females 2,369,778 2,357,603 -12,175 -0.5
Defined contribution plans 1,030,319 1,036,747 6,428 0.6
Males 616,941 625,165 8,224 1.3
Females 413,378 411,582 -1,796 -0.4
Other plans1 731,833 746,442 14,609 2.0
Males 422,478 439,230 16,752 4.0
Females 309,355 307,212 -2,143 -0.7
Public sector 3,179,312 3,184,276 4,964 0.2
Males 1,183,046 1,185,486 2,440 0.2
Females 1,996,266 1,998,790 2,524 0.1
Defined benefit plans 2,995,771 3,002,068 6,297 0.2
Males 1,104,591 1,107,382 2,791 0.3
Females 1,891,180 1,894,686 3,506 0.2
Defined contribution plans 146,290 143,034 -3,256 -2.2
Males 60,749 59,493 -1,256 -2.1
Females 85,541 83,541 -2,000 -2.3
Other plans1 37,251 39,174 1,923 5.2
Males 17,706 18,611 905 5.1
Females 19,545 20,563 1,018 5.2
Private sector 3,005,678 3,000,883 -4,795 -0.2
Males 1,909,433 1,923,276 13,843 0.7
Females 1,096,245 1,077,607 -18,638 -1.7
Defined benefit plans 1,427,067 1,399,902 -27,165 -1.9
Males 948,469 936,985 -11,484 -1.2
Females 478,598 462,917 -15,681 -3.3
Defined contribution plans 884,029 893,713 9,684 1.1
Males 556,192 565,672 9,480 1.7
Females 327,837 328,041 204 0.1
Other plans1 694,582 707,268 12,686 1.8
Males 404,772 420,619 15,847 3.9
Females 289,810 286,649 -3,161 -1.1

Source(s):

CANSIM table 280-0016.

 

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Best Financial Decision Ever

Whilst wandering through my massive archive of older articles, I tripped across Take the Money or Leave It? which I wrote about a month after I got laid off from Nortel, which ended up showing the Best Financial Decision I had made (ever0.

best decision

Image courtesy of Stuart Miles at FreeDigitalPhotos.net

In that article I mused the following interesting question (remember this was 2008 during the great crash):

The options I have are:

  1. Leave my money in my former (or soon to be) employer’s pension scheme and start drawing from it at either age 55 or later.
  2. Take the money out and put it into a Locked In Retirement Account (LIRA), or at least the portion that the government allows.

As background my current employers pension plan is under funded, by a fairly large amount. I also have passed a point, so that I can draw from the pension when I am 55.

Thanks to Mrs. C8j, Michael James and a little common sense on my part I ended up doing the second option and it was the best decision (read luckiest)  I ever made due to the fact that:

  1. Nortel’s Pension plan was even more under funded than anyone knew and it has serious issues paying out these days. I kept hearing that the Ontario Government had “insurance” to back up the pension, but given the money I took out that “insurance” would not have covered the amount I should have been paid. I also kept hearing “there is no way the government would let Nortel and/or its pension fail”, I think we know what happened there as well.
  2. The money I received went into an LIRA in December 2008, when stock prices were the lowest, and it grew a great deal, until I took it out to buy into my current employer’s pension plan. Again, blind luck and no great “market timing” strategy on my part, simply me needing to buy when the market is lowest.

This shows that many financial decisions cannot be evaluated as being “Good” or “Bad” immediately, sometimes it takes a while to realize it was the best decision, or a massive blunder.

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