Options for Registered Pension Plans on Retirement

What options do your clients have for receiving their Registered Pension Plan (RPP) entitlement, as they approach retirement? The Canada Revenue Agency has just released some guidelines that may help.

Assuming their pensions allow it, options upon retirement for an RPP member include:

1. Receive a pension for life under the terms of the plan
2. Transfer the amount in the plan to another RPP, locked-in RRSP, or locked-in RRIF
3. Take some or all of the pension as a lump sum (commuted value) and any remainder as a pension

For those who take a lump sum, the income tax consequences can be severe – unless that commuted value is transferred to a locked-in RRSP, locked-in RRIF, or a life annuity. It is the details of this last option that CRA has just clarified.

If a life annuity is purchased with the commuted funds, the right under the annuity contract must not be materially different from the pension plan. These types of annuities are often referred to as “copycat annuities” for that reason.

Where conditions are met, the retiree is deemed not to have received the lump sum from the RPP, so the lump sum is not included in income in the year the commuted value is used to purchase the “buy-out annuity.”

On December 4, the Registered Plans Directorate issued the document “Registered Pension Plan Annuity Contracts – Draft Newsletter for Industry Consultation” in which it sets out the rules for such annuities. The directorate will accept comments until March 31, 2019, on these guidelines.

One of the issues that has been of concern recently is the “not materially different” requirement. Most registered pension payments are indexed to the consumer price index whereas most annuities are not. The newsletter provides two options for indexing in the annuity:

• The midpoint of the Bank of Canada’s inflation-control target range at the date of purchase: bankofcanada/inflation
• The spread between the yield of Government of Canada long-term bonds and real return bonds in the month of or the month preceding the date of purchase: bankofcanada/lookup-bond-yields

If any other method of indexing is selected, the newsletter recommends sending a written request to the Registered Plan Directorate to ensure that the method is acceptable.

Additional educational resources: Get the credentials you need to help Canadians establish an effective retirement plan. Become an MFA – Retirement and Succession Services Specialist.  

Or discuss these new rules in the Round Table at the Advanced Personal Tax Update in one of six cities in January. 

Here’s a look at the highlights of these outstanding educational events.

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