Early retirement

Zoomer | January 1st, 2006

Companies and other organizations from various sectors are implementing a number of strategies in an effort to cut costs. The result? Many Canadians are facing permanent lay-off, voluntary early retirement or ‘forced’ early retirement. Individuals who were already planning to retire in the not-so-distant future, might accept this as an earlier beginning to life after work. If one of these scenarios apply to you, you have some important decisions to make.

Severance Pay
Upon termination, your employer will generally offer you a severance package and will typically pay it out as a lump-sum “retiring allowance.” Subject to limits, a retiring allowance is eligible for tax-free rollover to your RRSP. You have the option to roll eligible funds directly to your RRSP. With a direct transfer, your employer rolls the eligible amount straight into your RRSP. With an indirect transfer, the money is paid out to you first net of withholding tax and then you contribute any eligible amount to your RRSP. What’s the difference? By opting for the direct transfer, there is no tax withheld at source so the full eligible amount is deposited into your RRSP. With the indirect transfer,ake sure you contribute within 60 days following the end of the year of receipt.

Pension Plan Options
Another matter you’ll need to address is your company pension plan. You generally have two options upon termination: you can remain with the pension plan and receive a pension at retirement, or you can have the funds transferred to a “locked-in” RRSP plan, i.e. opt for the lump sum commuted value. By staying with the pension plan, among other benefits, you’ll be guaranteed a lifetime income and need not worry about the management of the funds. Your pension will usually provide a lifetime survivor benefit for your spouse, and may provide inflation protection. By transferring the funds to a locked-in plan, you have the ability to postpone receiving your retirement income until age 69. Furthermore, you’ll be able to control the management of the funds and select appropriate investments. With this option, the spouse can roll the entire value of the locked-in plan to his or her own RRSP at the planholder’s death. It should be noted however that opting out of the pension plan may mean that you forfeit group benefits such as dental, health and life insurance coverage.

The information contained in this report was obtained from sources believed to be reliable, however, we cannot represent that it is accurate or complete. Merrill Lynch Canada Inc. is not a tax advisor and we recommend that clients seek independent advice on tax related matters. The comments offered here are meant to be general in nature and are not intended to provide legal advice. In addition, legislation in this area is continually changing. Before taking any action, you should seek legal advice to ensure that your planning is appropriate to your personal circumstances and that it is effective in the jurisdiction in which you reside.