Helping your clients make pension and retirement decisions is a complex but important exercise. The whole nature of retirement has changed over the years, says Greg Hurst, a pension consultant and principal with Morneau Sobeco in Vancouver: “It’s no longer a cliff people fall off.” As a result, he says, clients may need help in “rethinking retirement.”

Although many Canadians still dream of retiring at 55, says David Ablett, a senior tax and retirement planning specialist with Investors Group Inc. in Winnipeg, people who want to stop working early may be shocked at just what their pension income will be if they take early retirement. Many people don’t understand what kind of pension they have through their work, he says.

For clients who belong to a workplace pension plan, Ablett notes, advisors will need to read the employee booklet handed out by the employer, along with the annual statement all pension plan sponsors are required to provide to plan members. The booklet will have all of the details about the client’s pension plan; the annual statement should indicate the client’s personal situation in the plan, along with other current information about the plan.

Some pension plans now have information on their Web sites, Ablett says, which may make it easier for advisors to get information about specific pension plans.

Questions to ask if your client is a member of a defined-benefit pension plan, Ablett says, are:

> Is the pension indexed for inflation, and is it fully indexed or adjusted only on an ad hoc basis?

> Does the plan provide a bridging benefit to age 65? If so, the pension will be integrated with the Canada Pension Plan, providing slightly higher benefits until the person is eligible to start getting CPP. But once CPP benefits kick in, the company pension will be reduced accordingly — something many people may have difficulty understanding.

> Does the pension plan have any solvency issues? If so, that should be indicated on the annual statement. A pension plan with funding problems may not provide a secure source of future income for your client and you may want to plan accordingly.

“Advisors can’t be blind to the funding risk of pensions,” Hurst warns.

Cindy Boates, a senior retirement consultant with Watson Wyatt Canada in Toronto, says advisors also should look at what kind of early-retirement provisions your client’s pension plan has. In other words: what is the earliest date at which the person can retire and receive an unreduced pension?

A DB plan could allow retirement at age 55, but with an actuarial reduction that could be as high as 50% or more, Boates points out. If that is the case, early retirement may be ruled out. And just because your client is entitled to retire with an unreduced benefit doesn’t necessarily mean it’s a good idea to retire, Hurst adds.

What about “buying back” past pensionable service? Hurst notes this is often an issue in public-sector pension plans, in which an employee may be able to consolidate service with two different levels of government, for example, or make up for a leave of absence by making up missed contributions while he or she was away.

But whether or not this is a good idea is a complex issue, Hurst points out. Among other things, you and your client will want to look at whether the employer will subsidize some or all of the buyback or whether the employee will be required to pay both the employer and employee contributions for the period of missed service.

Boates notes that buying back past service raises the issue of a past-service pension adjustment. While this adjustment doesn’t apply to service prior to 1990, it is designed to take back some of the RRSP room the person received during the period when they were not contributing to the pension plan. Getting a PSPA for a pension buyback could then mean the client will have to withdraw RRSP funds, resulting in tax consequences, Boates warns. Clients also may need assistance from their employers to figure out the options, she adds.

Boates says a typical DB plan pays a pension with a five-year guarantee. But some plans may have a pension with a 10- or 15-year guarantee, or even no guarantee at all. Some plans may allow a retiring member to transfer a lump sum into a locked-in account instead of taking a pension from the plan. While many people may think they can do better investing their own funds, they’re generally better off staying in the pension plan and getting a guaranteed annuity, Boates says.

@page_break@Ablett points out that pension legislation requires the normal form of DB pension to provide a benefit for the surviving spouse of a plan member at 60% of the contributor’s pension — unless the spouse agrees in writing to waive this right. In some jurisdictions, says Hurst, the spouse must waive the right to benefits outside the presence of the plan member.

Ablett says clients should consider a pension without a survivor benefit only if they have very good life insurance coverage.

Boates notes that some pension plans provide a survivor’s benefit without any reduction in the plan member’s retirement pension. In other cases, the pension of the member spouse will be reduced if there is to be a surviving spouse benefit, she points out.

If your client’s workplace pension plan is a defined-contribution plan, a lump sum will be available at retirement. Ablett explains that it can be used to buy an annuity that will provide a lifetime pension income — generally with a minimum guarantee payout period of 10 to 15 years — or it may be transferred to a locked-in account. While the locked-in account is also required to provide a lifetime income, the client must continue to manage the investments — something that may become more difficult as the client grows older. And, unlike a registered retirement income fund, there are both minimum and maximum annual withdrawal amounts.

While annuities generally are not favoured in a climate of low interest rates, Ablett points out, decisions about converting a pension lump sum to a locked-in account really depend on the risk tolerance of the client and his or her willingness or ability to continue investment management. One possibility would be to combine both options, putting some of the funds into an annuity and the rest into a locked-in account, he suggests.

Converting RRSPs to a form of retirement income — a step that must be taken by the end of the year in which the individual turns 69 — involves some of the same considerations as a DC pension plan, says Hurst.

Funds may be used to purchase a life annuity or rolled over into a RRIF, which has minimum annual withdrawal requirements but no maximum restrictions on withdrawals. Withdrawn amounts must be included in income and may then be taxable.

Hurst points out that RRSPs can be used to fill in the gaps around other forms of retirement income.

When to claim a CPP retirement pension is another issue you will want to discuss with your clients. While old-age security is available only at age 65, CPP may be claimed at any time between age 60 and age 70. But the amount of the pension will be actuarially reduced if it is claimed before age 65, and the person must have “substantially ceased” working. There is an actuarial enhancement if CPP is claimed between age 65 and 70.

Choices here may depend on whether the client needs additional income and how many years of contributory service the client has. Hurst recommends starting CPP if the client has already retired and is not going to make any more contributions.

But he warns there may be other retirement planning pitfalls to watch for. For example, marriage breakdown could trigger a requirement to split pension assets or income. The advisor should be aware of spousal entitlements under family property laws in such cases — especially if the advisor is working for an estranged spouse, Hurst says. For instance, he notes, in British Columbia, spousal rights to pensions evaporate after two years of living separate and apart — even if the couple is still married.

As well, health issues should not be over-looked. Boates suggests checking to see if employer-provided extended health coverage will continue after retirement. In some cases, she says, such coverage will be continued only if the client takes a pension from the pension plan and not if a lump-sum withdrawal from the plan is chosen. IE