SISIP Financial – Executive Financial Planning

Transcript

Welcome to the EXECUTIVE SCAN – Your Financial Planning briefing

As part of the CF Morale & Welfare Services SISIP Financial understands the realities of the military lifestyle and are the exclusive and trusted provider of financial products and services to Canada’s military community.

Our vision is that “Every member of the Canadian Armed Forces and their families have financial health and security!”

This briefing will address important financial planning considerations as you prepare for your release from the CAF:

A possible transition to civilian employment;
Tax planning considerations pre and post release; as well
The best timing to start receiving Canada Pension Plan (CPP) and Old Age Security (OAS) benefits 

Senior Officers may have significant accumulated/accrued and annual leave days upon release. They usually request advice on determining the best course of action: should they cash out this leave or go on retirement leave, in order to extend their years of service thereby receiving a larger pension?

For those CAF members with 35+ years of service, there is no further accrual of pensionable years of service, and taking retirement leave will have minimal financial value to the member. That being said, Senior Officers who rose rapidly within the Executive group, such that they received significant financial incentives (i.e Brigadier General to Major General to Lieutenant General) and have a substantial number of accrued and annual leave days, may find that there is a significant impact to their best five year average for pension purposes; they would then request that a calculation be made comparing pension benefits between both options (cashing out leave vs. retirement leave.).

For Senior Officers with less than 35 years CAF service, there should be a case by case analysis of the pros/cons of electing retirement leave versus cashing out leave 

Let’s look at two scenarios as an illustration…

Under scenario 1, Commodore Holly Halifax has 36 years of service, she is at the highest pay increment for her rank, and has 100 working days of accumulated/accrued and annual leave at time of release. She can elect to cash out her leave, receive $65,777 before-tax and be immediately pensionable, receiving $43,496 of pension income over the period equal to 100 working days (140 calendar days).

Holly can elect to take retirement leave which improves her five year average for pension calculation from $162,000 to $163,400, increases her years of service from 36.0 years to 36.38 years (but she has maximized eligible pension years at 35 years of service, therefore, this provides no added financial benefit for her) : her annual pension income increases by $980 per year (before-tax), she receives her salary of $65, 777 over the period of 100 working days (140 calendar days), but she does not collect any pension while she is on retirement leave.

If Holly were to cash out her leave, she would receive gross income of $65,777 leave and $43,496 pension income over the 100 working day period for a total of $109,273

If Holly goes on retirement leave, her pay is discounted by her contribution to CFSA (1% for indexation purposes after 35 yrs. service) thereby reducing her gross income to $ 65,120

The net difference between the two options is $ 109273 - $65120 = $44,153 : the gross pension increase is $980 per year, the break-even point to determine whether Holly was better off going on retirement leave vs. cashing out her leave is calculated as $ 44,153/$980 = 45 yrs.

If Holly releases at age 55, this means that she will only be further ahead with the retirement leave option once she reaches age 100 …. 

She will be further ahead by cashing out her leave, and collecting her pension income sooner …

Now let’s look at the second scenario:

Brigadier General Tim Trenton has 31.6 years of service, he is at the first pay increment for his rank and also has 100 days of accumulated/accrued annual leave: he can elect to cash out his leave of $62,383 and be immediately pensionable, receiving $36,612 over the 100 working days (140 calendar days).

Tim can elect to go on retirement leave, which extends his years of service from 31.6 to 32 years, increases his best five year average from $150,900 to $152,100, increases his annual pension by $1,925 (before –tax ) but he does not collect any pension income while on retirement leave.

If Tim cashes out his leave, his gross income is $62,383 (leave) plus $36,612 (pension) for a total of $98,995

If Tim goes on retirement leave, his pay is discounted by his pension contributions to CFSA ($6,887) which reduces his income to $55,496.

The difference between these options is $98,995-$55,496 = $43,499, the annual increase in pension is $1,925, so the break-even point to determine whether or not taking the retirement leave was the best option is $43,499/$1,925  = 22.6 yrs. .

Although the break-even point is shorter for Tim than Holly, he has lost the use of $36,612 of pension income (money left on the table) that could have been used towards paying down debt, large ticket purchases, financially assisting children or elderly parents, etc.

Reasons to consider taking retirement leave include:
it extends your release date, which in turn extends your time for electing your final Intended Place of Residence (IPR) and finalizing your claim;
It can also create additional RRSP contribution room for Senior Officers with more than 35 years (pension contributions to CFSA reduced to 1% for indexation, creating more RRSP contribution room for Severance Pay rollover when retirement leave pushes them into the next calendar year).

Reasons to not consider taking retirement leave:
lost pension income delays tax benefit of pension income splitting with spouse;
leaves money on the table that could have been redirected to other financial goals…   

Maximizing severance rollover to RRSP in the year of release is a tremendous tax-deferral tool for the following reasons :

Your taxable income in your release year could be your highest ever, with marginal tax rates hovering between 48-53%, depending on your province of residence at year-end of your release year. As such, any opportunity to defer income tax to a year with a lower marginal tax rate will be beneficial (i.e.: a CAF pensioner, resident of Alberta, fully splitting a $120K pension with a spouse is in a 30% marginal tax bracket);

You have additional RRSP contribution room due to Severance Pay (retiring allowance) at time of release : an additional $2,000 per year of service pre-1996: given that most Senior Officers only accrue new RRSP room at a rate of $600 per year, this special limit is a government gift. The eligible amount of this rollover must go into your RRSP (not Spousal RRSP, nor your Spouse’s RRSP);

By maximizing severance rollover to RRSP, you control the eventual timing, amount and marginal tax rates of the redemption, in order to maximize the after-tax benefits for you and your family;

RRSPS when converted to RRIFs allow for income splitting possibilities with your spouse, as of age 65;

By naming your spouse as RRSP beneficiary, in the event of your premature death, and since your spouse will be receiving 50% of your CAF pension as a Survivor Benefit, taxes withheld on RRSP withdrawals at their lower marginal tax brackets will permit a greater after-tax benefit for your spouse (Estate) than had you redeemed in your release year at the highest marginal tax bracket.

Redeeming from a spouse’s RRSP or spousal RRSP if they have little or no income prior to your release can be advantageous as they are not yet pension income splitting with you, the taxes due on their RRSP redemptions will now be much lower than once income splitting starts. Senior Officers have used this tool for debt pre-payment (i.e. mortgage lump-sums ), maximizing TFSA, assisting children, etc.

Be cautious of the three year Spousal RRSP attribution rule. CRA takes a last-in /first-out view on redemptions from Spousal RRSP. Therefore, any redemptions equal to contributions made in the most recent three calendar years will be attributable and taxable to the contributing spouse.

There is a unique pension characteristic for many EXECUTIVE Officers based on salary in excess of established thresholds. This  will apply mostly to ranks of Brigadier General and above (and Navy equivalent) as well as some Medical and Legal Officers.

The Income Tax Act defines a maximum pension entitlement permitted based on pension contributions to a maximum annual salary. Pension contributions in excess of this maximum salary are directed to a Retirement Compensation Arrangement (like a supplementary executive pension plan)

The bulk of your pension income will be recorded on a T4 A – Defined Benefit Pension. The excess pension income derived from pension contributions, in excess of the maximum annual salary, will be recorded on a T4A-RCA.

Eligibility for pension income splitting – prior to the CAF member reaching age 65, only the pension income recorded on the T4A -Defined Benefit Pension- is eligible for pension income splitting. The income recorded on the T4A – RCA is taxable to the CAF member only.

Once the CAF member reaches age 65, the income from the RCA is eligible to be split with your spouse.

restrictions, immediately upon receipt of pension income. This income splitting is also eligible in all provinces immediately, with no age restrictions, with the exception of Quebec (eligible only once the pensioner reaches age 65).

This table shows the annual tax savings from pension income splitting assuming only a pension income of $100K ( *the Quebec figures illustrates savings before and at age 65).

The tax savings can be greater in two instances: when the pension income is greater, or the releasing CAF member transitions to a Second Career, and has both employment income and pension income.

The amount of the pension which represents the bridge benefit is available by calling the pension department at 1-800-267-0325

When applying for your Canada Pension Plan (CPP), you can apply for the regular benefit, as early as age 59 years + 1 month, for receipt anytime between age 60-70    

Displayed on the screen are the maximum amounts for both monthly and yearly pensions received in 2017, for ages 60, 65 and 70.

Please note that if you are a recipient of a CPP Disability Pension, you must notify the CAF Pension department at 1-800-267-0325, as your bridge benefit would cease.
Old Age Security
The Old Age Security (OAS) pension is a monthly payment available to most people 65 years of age and older who meet the Canadian legal status and residence requirements.
Your employment history is not a factor in determining eligibility: you can receive the OAS pension even if you have never worked or are still working.

Payments

Your OAS pension payments will begin during one of the following months, whichever is latest:
the month after you meet the residence and legal status requirements
the month after your 65th birthday
the month you asked your OAS pension to start and you meet all eligibility requirements

Deferral

Some CAF members work past age 65, and their net incomes exceed the maximum recovery threshold ($121,279 in 2017) :
Those members can elect to defer their OAS application until a year where the OAS will be more beneficial (reduced net income which reduces or eliminates the OAS recovery) and see their OAS benefit increased by a bonus of 7.2% per year for every full year they defer their OAS request up to age 70.

Public Service Health Care Plan (PSHCP) and Public Service Dental Plan (PSDP) insurance premiums are eligible medical expenses for tax purposes.

While serving, your deductible premiums (coverage for your eligible dependents) can be requested via a letter from PSHCP and PSDP

Once released, your premiums (for you and your eligible dependents) will be highlighted in Box 135 of your T4A Defined Benefit Pension slip.
Because your family’s investment savings are important to you they are also important to us. This is why SISIP Financial follows four core Investment Beliefs that I would like to share with you.  Our Investment beliefs represent the values and guiding principles we abide by in terms of our approach to our members’ investment and lifelong savings...

We believe in active management
We believe in a structured investment approach
We believe in asset allocation and diversification
We are committed to providing unbiased tailored advice.

Look for this poster in all SISIP Financial locations, across Canada, for a detailed look at our 4 investment beliefs, and let us help you make sound investment decisions with your hard earned savings. 

SISIP Financial has a team of over 90 financial professionals who know and understand the complexities of our military community.

For the convenience of our members we are located on all major Bases and Wings across Canada.
We are working together to find you the best financial solutions available through SISIP Financial and our various partners.

Let us help you navigate the labyrinth;  seek the advice of a SISIP Financial Professional.

We wish you a smooth transition and a wonderful retirement.

Download video (.mp4 42.9 MB)

Welcome to the EXECUTIVE SCAN – Your Financial Planning briefing

As part of the CF Morale & Welfare Services SISIP Financial understands the realities of the military lifestyle and are the exclusive and trusted provider of financial products and services to Canada’s military community.

Our vision is that “Every member of the Canadian Armed Forces and their families have financial health and security!”

This briefing will address important financial planning considerations as you prepare for your release from the CAF:

A possible transition to civilian employment;
Tax planning considerations pre and post release; as well
The best timing to start receiving Canada Pension Plan (CPP) and Old Age Security (OAS) benefits 

Senior Officers may have significant accumulated/accrued and annual leave days upon release. They usually request advice on determining the best course of action: should they cash out this leave or go on retirement leave, in order to extend their years of service thereby receiving a larger pension?

For those CAF members with 35+ years of service, there is no further accrual of pensionable years of service, and taking retirement leave will have minimal financial value to the member. That being said, Senior Officers who rose rapidly within the Executive group, such that they received significant financial incentives (i.e Brigadier General to Major General to Lieutenant General) and have a substantial number of accrued and annual leave days, may find that there is a significant impact to their best five year average for pension purposes; they would then request that a calculation be made comparing pension benefits between both options (cashing out leave vs. retirement leave.).

For Senior Officers with less than 35 years CAF service, there should be a case by case analysis of the pros/cons of electing retirement leave versus cashing out leave 

Let’s look at two scenarios as an illustration…

Under scenario 1, Commodore Holly Halifax has 36 years of service, she is at the highest pay increment for her rank, and has 100 working days of accumulated/accrued and annual leave at time of release. She can elect to cash out her leave, receive $65,777 before-tax and be immediately pensionable, receiving $43,496 of pension income over the period equal to 100 working days (140 calendar days).

Holly can elect to take retirement leave which improves her five year average for pension calculation from $162,000 to $163,400, increases her years of service from 36.0 years to 36.38 years (but she has maximized eligible pension years at 35 years of service, therefore, this provides no added financial benefit for her) : her annual pension income increases by $980 per year (before-tax), she receives her salary of $65, 777 over the period of 100 working days (140 calendar days), but she does not collect any pension while she is on retirement leave.

If Holly were to cash out her leave, she would receive gross income of $65,777 leave and $43,496 pension income over the 100 working day period for a total of $109,273

If Holly goes on retirement leave, her pay is discounted by her contribution to CFSA (1% for indexation purposes after 35 yrs. service) thereby reducing her gross income to $ 65,120

The net difference between the two options is $ 109273 - $65120 = $44,153 : the gross pension increase is $980 per year, the break-even point to determine whether Holly was better off going on retirement leave vs. cashing out her leave is calculated as $ 44,153/$980 = 45 yrs.

If Holly releases at age 55, this means that she will only be further ahead with the retirement leave option once she reaches age 100 …. 

She will be further ahead by cashing out her leave, and collecting her pension income sooner …

Now let’s look at the second scenario:

Brigadier General Tim Trenton has 31.6 years of service, he is at the first pay increment for his rank and also has 100 days of accumulated/accrued annual leave: he can elect to cash out his leave of $62,383 and be immediately pensionable, receiving $36,612 over the 100 working days (140 calendar days).

Tim can elect to go on retirement leave, which extends his years of service from 31.6 to 32 years, increases his best five year average from $150,900 to $152,100, increases his annual pension by $1,925 (before –tax ) but he does not collect any pension income while on retirement leave.

If Tim cashes out his leave, his gross income is $62,383 (leave) plus $36,612 (pension) for a total of $98,995

If Tim goes on retirement leave, his pay is discounted by his pension contributions to CFSA ($6,887) which reduces his income to $55,496.

The difference between these options is $98,995-$55,496 = $43,499, the annual increase in pension is $1,925, so the break-even point to determine whether or not taking the retirement leave was the best option is $43,499/$1,925  = 22.6 yrs. .

Although the break-even point is shorter for Tim than Holly, he has lost the use of $36,612 of pension income (money left on the table) that could have been used towards paying down debt, large ticket purchases, financially assisting children or elderly parents, etc.

Reasons to consider taking retirement leave include:
it extends your release date, which in turn extends your time for electing your final Intended Place of Residence (IPR) and finalizing your claim;
It can also create additional RRSP contribution room for Senior Officers with more than 35 years (pension contributions to CFSA reduced to 1% for indexation, creating more RRSP contribution room for Severance Pay rollover when retirement leave pushes them into the next calendar year).

Reasons to not consider taking retirement leave:
lost pension income delays tax benefit of pension income splitting with spouse;
leaves money on the table that could have been redirected to other financial goals…   

Maximizing severance rollover to RRSP in the year of release is a tremendous tax-deferral tool for the following reasons :

Your taxable income in your release year could be your highest ever, with marginal tax rates hovering between 48-53%, depending on your province of residence at year-end of your release year. As such, any opportunity to defer income tax to a year with a lower marginal tax rate will be beneficial (i.e.: a CAF pensioner, resident of Alberta, fully splitting a $120K pension with a spouse is in a 30% marginal tax bracket);

You have additional RRSP contribution room due to Severance Pay (retiring allowance) at time of release : an additional $2,000 per year of service pre-1996: given that most Senior Officers only accrue new RRSP room at a rate of $600 per year, this special limit is a government gift. The eligible amount of this rollover must go into your RRSP (not Spousal RRSP, nor your Spouse’s RRSP);

By maximizing severance rollover to RRSP, you control the eventual timing, amount and marginal tax rates of the redemption, in order to maximize the after-tax benefits for you and your family;

RRSPS when converted to RRIFs allow for income splitting possibilities with your spouse, as of age 65;

By naming your spouse as RRSP beneficiary, in the event of your premature death, and since your spouse will be receiving 50% of your CAF pension as a Survivor Benefit, taxes withheld on RRSP withdrawals at their lower marginal tax brackets will permit a greater after-tax benefit for your spouse (Estate) than had you redeemed in your release year at the highest marginal tax bracket.

Redeeming from a spouse’s RRSP or spousal RRSP if they have little or no income prior to your release can be advantageous as they are not yet pension income splitting with you, the taxes due on their RRSP redemptions will now be much lower than once income splitting starts. Senior Officers have used this tool for debt pre-payment (i.e. mortgage lump-sums ), maximizing TFSA, assisting children, etc.

Be cautious of the three year Spousal RRSP attribution rule. CRA takes a last-in /first-out view on redemptions from Spousal RRSP. Therefore, any redemptions equal to contributions made in the most recent three calendar years will be attributable and taxable to the contributing spouse.

There is a unique pension characteristic for many EXECUTIVE Officers based on salary in excess of established thresholds. This  will apply mostly to ranks of Brigadier General and above (and Navy equivalent) as well as some Medical and Legal Officers.

The Income Tax Act defines a maximum pension entitlement permitted based on pension contributions to a maximum annual salary. Pension contributions in excess of this maximum salary are directed to a Retirement Compensation Arrangement (like a supplementary executive pension plan)

The bulk of your pension income will be recorded on a T4 A – Defined Benefit Pension. The excess pension income derived from pension contributions, in excess of the maximum annual salary, will be recorded on a T4A-RCA.

Eligibility for pension income splitting – prior to the CAF member reaching age 65, only the pension income recorded on the T4A -Defined Benefit Pension- is eligible for pension income splitting. The income recorded on the T4A – RCA is taxable to the CAF member only.

Once the CAF member reaches age 65, the income from the RCA is eligible to be split with your spouse.

restrictions, immediately upon receipt of pension income. This income splitting is also eligible in all provinces immediately, with no age restrictions, with the exception of Quebec (eligible only once the pensioner reaches age 65).

This table shows the annual tax savings from pension income splitting assuming only a pension income of $100K ( *the Quebec figures illustrates savings before and at age 65).

The tax savings can be greater in two instances: when the pension income is greater, or the releasing CAF member transitions to a Second Career, and has both employment income and pension income.

The amount of the pension which represents the bridge benefit is available by calling the pension department at 1-800-267-0325

When applying for your Canada Pension Plan (CPP), you can apply for the regular benefit, as early as age 59 years + 1 month, for receipt anytime between age 60-70    

Displayed on the screen are the maximum amounts for both monthly and yearly pensions received in 2017, for ages 60, 65 and 70.

Please note that if you are a recipient of a CPP Disability Pension, you must notify the CAF Pension department at 1-800-267-0325, as your bridge benefit would cease.
Old Age Security
The Old Age Security (OAS) pension is a monthly payment available to most people 65 years of age and older who meet the Canadian legal status and residence requirements.
Your employment history is not a factor in determining eligibility: you can receive the OAS pension even if you have never worked or are still working.

Payments

Your OAS pension payments will begin during one of the following months, whichever is latest:
the month after you meet the residence and legal status requirements
the month after your 65th birthday
the month you asked your OAS pension to start and you meet all eligibility requirements

Deferral

Some CAF members work past age 65, and their net incomes exceed the maximum recovery threshold ($121,279 in 2017) :
Those members can elect to defer their OAS application until a year where the OAS will be more beneficial (reduced net income which reduces or eliminates the OAS recovery) and see their OAS benefit increased by a bonus of 7.2% per year for every full year they defer their OAS request up to age 70.

Public Service Health Care Plan (PSHCP) and Public Service Dental Plan (PSDP) insurance premiums are eligible medical expenses for tax purposes.

While serving, your deductible premiums (coverage for your eligible dependents) can be requested via a letter from PSHCP and PSDP

Once released, your premiums (for you and your eligible dependents) will be highlighted in Box 135 of your T4A Defined Benefit Pension slip.
Because your family’s investment savings are important to you they are also important to us. This is why SISIP Financial follows four core Investment Beliefs that I would like to share with you.  Our Investment beliefs represent the values and guiding principles we abide by in terms of our approach to our members’ investment and lifelong savings...

We believe in active management
We believe in a structured investment approach
We believe in asset allocation and diversification
We are committed to providing unbiased tailored advice.

Look for this poster in all SISIP Financial locations, across Canada, for a detailed look at our 4 investment beliefs, and let us help you make sound investment decisions with your hard earned savings. 

SISIP Financial has a team of over 90 financial professionals who know and understand the complexities of our military community.

For the convenience of our members we are located on all major Bases and Wings across Canada.
We are working together to find you the best financial solutions available through SISIP Financial and our various partners.

Let us help you navigate the labyrinth;  seek the advice of a SISIP Financial Professional.

We wish you a smooth transition and a wonderful retirement.

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