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Maximizing Employer-Funded Pensions

Benefits received as superannuation from an employer-funded pension are taxable and qualify for a $2000 pension income amount on the personal tax return each year. Before leaving your employment, however, it is important to know about three specific opportunities that can help you leverage your company pension significantly:
  • pension income splitting
  • phased in retirement
  • transfers of RRSP accumulations into an RPP

Pension Income Splitting

Starting in January 2007, Canadian retirees can split up to 50% of pension income received from various private pension sources; however, the rules are somewhat skewed in favor of those who have employer-sponsored plans. That's because qualifying pension income for these ­purposes is linked to the taxpayer's eligibility for the $2000 pension income amount on line 314 of the tax return.

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Specifically, superannuation received on a periodic basis from an employer-sponsored plan is an eligible source for pension income splitting at any age; while periodic pension income received from an RRSP or RRIF is not, until the age of 65. (It would therefore be good for the self-employed, who need to rely on their RRSP accumulations to fund retirement, to consider starting an employer-funded pension plan within their companies well before ­retirement to take advantage of the lucrative results pension income splitting can bring.)

In fact, the pension income splitting opportunity puts the RPP first on the list of "pension income buckets". Pension income provides:

  • an additional tax-free zone (the $2000 pension income amount for each person, over and above the Basic Personal Amount) and
  • averages tax downward on the superannuation itself, taking full advantage of our progressive tax system.

In fact if the spouse to which the income is being split is under age 65 and has no other income, s/he will be able to receive about $1000 a month tax-free (sheltered by the $10,100 Basic Personal Amount and $2000 for the pension income amount).

That's a simply great way to add to your capital accumulations while you enjoy tax-free cash flow! Consider this planning example for Guy and Samantha who are age 65 and 66 respectively and live on Guy's superannuation of $2000 a month, as well as receiving maximum benefits from the CPP and OAS: pension income splitting saves this family about $1200 a year.

Now consider the potential for capital accumulation by investing those savings in a TFSA every year for the entire retirement period Samantha is planning for. Capital accumulations-even before tax-free investment income is earned-will be close to $23,000. Considering that the median net worth of Canadians in the 65 plus age category is $155,000, this single income tax provision has increased this family's net worth in the retirement period, by almost 15%! And that's before any tax-free investment income growth.

Phased-In Company Pensions

To make sure qualifying pension income is generated to maximize these income splitting advantages, use another new provision available to those age 55 or older: phased-in pensions. An employee is able to draw up to 60% of the benefits that have otherwise accrued under the employer-sponsored pension plan while continuing to accumulate benefits based on current employment, provided that the employee is at least 55. No conditions are imposed on whether the employee works part- or full-time.

That means you can work part-time, draw up to 60% of your superannuation, split the income with your spouse and pay a low rate of tax, all the while continuing to accrue pension benefits. That's a great use of tax-efficiency. It makes sense to take the opportunity to generate income in two hands rather than just one. Later in retirement you just may not have that chance.

Transfer of Funds from a Taxpayer's RRSP

It is possible to transfer capital accumulated within an RRSP on a tax-free basis to an RPP that you may be a member of. Given that you'll have to wait to qualify for the opportunity for pension income splitting until age 65 if your money stays in the RRSP, this can make absolute sense. Form T2033 may be used to affect the transfer. Check with your payroll department to make sure the terms of the RPP will allow this.

However, remember, this has to happen while you are still a member of the pension plan.


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