Let’s look at a quick scenario we typically come across as financial planners working with pensioners. You are about 5 years away from retirement. You have put in a solid number of years in the public sector where you enjoyed many benefits including consistent contributions to a defined benefit pension plan. You have been diligent over the years and continued to contribute to your RRSP accounts (although the pension took most of your contribution room) and you have been a participant in the Canada Pension Plan and Old Age Security programs throughout the duration of your employment years.
Now that you are approaching retirement you are wondering “What will my retirement income look like?” This is a very common question we get from clients looking to retire. Typically, the sources of monthly income from a retiree in this scenario will be their work pension income, government benefits (once triggered), and RSP/RIF savings. Here are some issues with this picture:
First, Taxation. The income sources outlined above are all currently taxed the exact same way; the same way as if you earned a dollar of salary income. Because you do not get any tax-preferential treatment on these sources of income, any additional income is taxed at your highest tax rate: your marginal tax rate.
Second, Forced Income. Now that you have retired, you are starting to receive your work pension income, your government benefits, as well as your RIF income (age 72 onwards). Once these income sources are turned on, they cannot be turned off. The issue with this scenario is that you could be pushed into drawing potentially unneeded income that will force you into unnecessary tax brackets, resulting in more of your income being paid to the government in tax dollars. This could further result in government benefit clawbacks (OAS).
Third, Major Expenses. Major expenses are becoming the biggest issue we see facing pensioners during retirement. The concern being, where can you access lump sums of money in the event of unexpected expenses? These expenses inevitably come up, whether it’s a new car, new roof on the house, assistance to children or medical expenses. You can’t go to your pension plan or government benefits as they do not allow access to funds. You don’t want to go to your RSP/RIF account as this withdrawal would count as taxable income added on top of your already established income sources, pushing your total income into higher tax brackets creating great inefficiencies.
To combat all three of these issues we need to access a liquid, tax-free, and non-forced pool of money. Thankfully the TFSA (Tax- Free Savings Account) will tick these boxes. A TFSA environment allows for tax-free growth on your money, no withdrawal requirements, and no taxation when you choose to withdraw your funds.
To summarize, by incorporating a TFSA and its unique features into your overall financial plan you can minimize some of the typical challenges pensioners face, given our current retirement landscape. ■
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