An alternative to the traditional RRSP, these plans are best suited to individuals age 45 and above, with annual earnings in excess of $130,000.

IPPs offer higher annual contribution limits than RRSPs, as well as the opportunity for substantial past service contributions. Both the annual “current service” and “past service” contributions are fully tax deductible to the employer.

In essence, an IPP provides the opportunity to transfer significant funds from the company into a defined benefit pension plan for the individual on a tax free basis.

For example, a male age 55 would have an RRSP contribution limit of $22,970 in 2012. With an IPP, the current service contribution for 2012 could be up to $32,445, almost $10,000 more.

Here’s how the numbers would look assuming this same individual implemented an IPP in 2012, had met maximum earnings criteria since 1991, and had made maximum RRSP contributions during that same period:

Past Service Liability: $657,153

Less RRSP Transfer: (442,940)

Net Past Service

Contribution: $214,213

Add Current Service

Contribution: $32,445

Total IPP Contribution: $246,658

For more information or to determine whether this strategy is appropriate for you, call us at 604.688.7208

Firstly, look at investment alternatives with a reduced volatility mandate. For instance you can purchase an investment fund that looks to achieve a consistent rate of return over 91-day treasury bills. The higher the consistent rate of return you are looking for will result in more volatility. Also, understanding the mandate of an investment fund will certainly provide clues to how volatile the investment experience will be. 

Secondly, is to look at products that have guarantees attached to them. Insurance companies will offer investment solutions that will provide either an income guarantee that will provide guaranteed bonuses and income in the future or a 100% maturity guarantee. This option can provide you with access to the volatile investment markets knowing your principal or income will always be guaranteed.

Living through the volatility of equity markets can be extremely stressful for those who have significant investment portfolios. 

Over the past few years it has not been uncommon to see the value of many equity portfolios seesaw back and forth with as much as 40% or more declines registered. Since most individuals look to the total value of their estate to provide for their family in the event of their death, a sudden demise would create a hardship for the survivors where the estate value has suffered a significant decline. This is especially true where investors look upon the asset value of their portfolio as an alternative to life insurance protection. An investor might pose the question, “If my portfolio is worth $2,000,000 why do I need to have life insurance if this amount is sufficient to take care of my family in the event of my death?”

This is a valid question, but it is prudent to consider the effect of volatility on the investment portfolio and the effect that has on the protection afforded the family. The old saying, “Hope for the best, but plan for the worst” is very applicable when viewing an investment portfolio as security for the family in the event of the death of the investor.  

In our example, if the funds mentioned fell by 30% how would the loss of $600,000 of value impact the family if the investor were to die. Also, without proper planning, the $1,400,000 decreased value could still include accrued gains. There could also be taxes due at death (in all probability there would be probate fees) which would reduce the value of the estate even further. With this in mind, it is important and prudent to look at the risk management of the estate value of an investment portfolio in light of the negative effect that a downturn in the market would have on the security for the investors’ heirs.

Let’s look at a concept that was conceived during the bear market of 2001-2002, known as the mortality hedge. Under this strategy, the investor would designate a percentage of his investment portfolio he would want to protect with life insurance to offset the potential loss of estate value due to a market downturn. 

Assuming our $2,000,000 investor was a non-smoking male age 52 and he wished to implement a 30% “hedge” to protect his family. He would purchase $600,000 of life insurance. Assuming he wanted to guarantee the cost of this hedge for 20 years, the annual premium of this coverage would be $2,726. Since this coverage is part of an overall investment strategy, if we were to express the annual premium as an addition to the portfolio’s investment management fee, this premium would equal approximately 14 basis points or 0.136% of the total portfolio. Of course, the cost varies depending upon your age. 

By using the mortality hedge, the investor won’t have to worry about the day to day and month to month volatility of the markets knowing that the estate value is protected.

Whether TFSAs are a better long term savings choice over an RRSP depends on your tax rate now, versus what your tax rate will be when you withdraw your money. If your tax rate is higher when you withdraw money, then the TFSA makes more sense. However, if your tax rate is lower when you withdraw money, then the RRSP is the better choice.

Generally, maximizing both your RRSP and TFSA is your best option, but if money is limited, for most working people saving for retirement, maximizing your RRSP first (to get a bigger tax refund in a higher tax year) makes the most sense.

TFSAs are advantageous for maintaining your ‘emergency fund’, saving for short term goals, and when you have already maximized your RRSP room.

Once you reach age 65, your government entitlements will be income tested. As TFSA earnings and withdrawals are not reported as income, thus potentially preserving government entitlements.

An individual who invests in PensionBuilder will receive a guaranteed income for the rest of his or her life at a fixed rate of return (income benefit payout percentage).  The payout percentage is set at the time of the income selection, from 3.75% at age 50 to 6.75% at age 80.  If the income option is deferred for one or more years after deposit, the investor will receive a 5% bonus for each year deferred.  This bonus is notional and increases the value against which the payout percentage is applied.  For example, let’s assume that an individual makes a $100,000 deposit into PensionBuilder at age 65 but defers taking his or her income until age 71.  With bonuses, at age 71, the total retirement fund for income purposes has grown to $125,000. At age 71, the income benefit payout percentage is 5.85% resulting in a guaranteed income for life of $7,312.  If income had been taken at age 65 the income benefit payout percentage would have been 5.25%.  The effect of waiting five years to take income has increased the payout percentage from 5.25% to 7.312% guaranteed for life.

If, however, the funds deposited were an RSP and were converted to a RRIF at age 71, the minimum income required by law to be withdrawn as a RRIF minimum may be higher than the benefit payout percentage of the Pension Builder. In this case, PensionBuilder guarantees that the payout will be the RRIF minimum or the benefit payout percentage whichever is the HIGHER.  Income may also be structured as a joint life payout with a benefit payout percentage that is 50 basis points less than a single life payout. 

At first glance, PensionBuilder may resemble a life annuity which also pays a guaranteed income for life.  PensionBuilder, however, has features and contract provisions which differentiate it from an annuity.  Some of these are as follows:

• An annuity is a single, closed transaction meaning that once contracted it cannot be undone or surrendered for value, whereas PensionBuilder can be surrendered for its market value at any time (a charge may apply):
• In an annuity, should the annuitant die after the expiration of the guaranteed period, there is no residue to the estate or beneficiaries.  With PensionBuilder if market conditions are favourable a death benefit could result which could be significant;
• PensionBuilder allows for additional deposits to be made prior to the income period.  In our previous example, the investor could make contributions for the first five years in addition to the $100,000 deposit, providing for even more lifetime guaranteed income when that option is taken.

For investments which are non-registered the income provided by PensionBuilder is very tax efficient.  Most of the income received is considered to be a return of capital and compares most favourably to other non-registered investments such as bonds or guaranteed investment certificates.

All deposits made to PensionBuilder are invested in a “fund of funds” that Manulife has created for this purpose. The PensionBuilder fund is comprised of three of Manulife’s conservative investment funds.  PensionBuilder is a segregated fund and, as such, may provide protection against creditor claims. Also, since a beneficiary is named there is no probate nor administrative costs at death, nor any Wills Variation legislation concerns.

For investors who have been concerned with market stability in the years leading up to their retirement, PensionBuilder from Manulife Financial may be as close to a sure thing as they are going to find. 

If you are interested in reviewing your retirement planning, call us and we can discuss this and other investment opportunities in more detail.

SHAREHOLDERS’ AGREEMENTS – It is customary for a company with more than one shareholder to have in place an agreement between the shareholders which predetermines a course of action for specific situations. This agreement should include a Buy/Sell provision which deals with how a share interest will be purchased or redeemed in the event that a shareholder relinquishes or wishes to relinquish his or her shares in the company, including the death. The corporation will then insure each of the shareholders to the extent that the provision in the agreement dealing with death is all or partially funded. The same is true for those businesses operating as a partnership, as there should be a partnership agreement with provisions similar to the corporate agreement.

The corporation should own and be the beneficiary of sufficient life insurance on each of the partners in order to meet its obligations to re-purchase or redeem the shares of the deceased shareholder from his or her estate. The Shareholders’ Agreement usually has a method of valuing the shares and this is the appropriate amount for which the shareholder should be insured.

KEY PERSON LIFE INSURANCE – A company may employ an individual whose active participation in the company is vital to its success. Some of examples of this “key person” , include an individual who is responsible for the sales success of the company’s product; it could be someone who has an intellectual property key to the enterprise’s good fortune; a law firm may have as a partner an outstanding litigator or effective rainmaker. In other words, if the company should suffer financially as a result of the loss of any employee, shareholder or otherwise, then that company has an insurable interest in that individual.

The amount of life insurance coverage that the company would take on that key person is usually determined by an estimate as to how much the company would suffer financially if the key employee were to die. Sometimes this can be an arbitrary number, although the insurance company requires justification for any amount of coverage they would issue for this purpose. In other situations, an analysis is undertaken to estimate the loss to share value due to the death of the employee. A company may want to insure such an individual to provide sufficient funds to attract, train and employ a replacement. Usually, this number would include two years salary in addition to acquisition and training costs.

LIFE INSURING DEBT – Often a business will make use of bank debt to produce income. This debt may be for normal operating expenses, to make an acquisition vital to the business purpose of the corporation and its shareholders, to pay a dividend to shareholders, or to make a pension contribution for its employees, to name a few. Where the company has borrowed for a business purpose, it is prudent for the firm to insure the lives of the principals so that if there was a death, the loan would be retired. This would protect the working capital of the firm, and would contribute to guaranteeing the financial stability of the company even though it has just lost a key shareholder. Also, many lenders require the shareholders to provide personal guarantees to secure the loan. By life insuring the shareholder in this arrangement, the estate of the deceased is relieved of this burden.

There are some tax advantages for corporations to insure their shareholders to secure debt as well. If the bank requires the life insurance as a condition of the loan (or provides a letter to that effect), a portion of the premium may be tax deductible to the corporation. In order to obtain this deduction the transaction must meet specific criteria as stated in the Income Tax Act. Upon the death of the shareholder, there is another benefit which could accrue to the benefit of the surviving shareholders. Even though the entire proceeds of the life insurance are used to retire the loan, there could be a contribution to what is known as the Capital Dividend Account for an amount up to the insurance proceeds which are used to repay the loan. Capital Dividends can then be paid tax free to the surviving shareholders. In effect, this means that future corporate earnings, retained earnings, or other cash assets can be paid tax free to the shareholders.

The amount of the life insurance required for this use could be equal to the amount of bank or other debt the company has incurred.

These are the main uses of corporate owned life insurance. Other corporate uses for life insurance exist in more sophisticated arrangements. For example, some corporations use life insurance as part of a charitable giving strategy. We can assist you in determining where the needs for life insurance exist in your corporation and how to establish the appropriate amount. Please call us should you wish to investigate the prudent business practice of corporately owned life insurance.

Life insurance premiums are based on the age and health of the applicant. In a typical situation, a married couple will buy their first life insurance policy once they have started a family, to cover the risk of an income earner passing away unexpectedly. In many cases the applicant may be facing certain health problems which result in higher premiums, and in some cases they may be completely declined due to poor health. Conversely, buying a permanent life insurance policy for your young child has a lower cost and is guaranteed to be in force for their entire life, even if they develop a serious illness later in life.

Additionally, the gift of a universal or whole life policy to a child or grandchild allows values to accumulate tax deferred so that eventually it can be used to help them go to university,  buy a home, start their own business, or even  supplement their retirement.

Finally, with proper planning, such a gift is protected from future claims of creditors and guarantees an estate to your child or grandchild.

The most affordable benefit plan for a small business is contingent on many factors unique to each individual business. Demographic factors of age, sex, occupation and marital status of a company’s employees affect which benefit plan is most economical. There are also a number of different ways in which a benefit plan can be funded. A self-insured plan requires the business to pay directly for the cost of employee expenses, while an insured plan involves the business paying a set fee (rate) to an insurance company, who then bears the cost of providing the agreed upon benefits. Another option is insure one’s small business through a pool of companies, which eliminates the volatility from year to year. Companies can choose to build a plan that uses a combination of these different funding methods and plan designs.

Building a cost-effective benefits plan for a small business can be an extremely complex process. However, with the help of an employee benefits expert, it can be simplified and save a business a great deal of money in the long run, while still fulfilling the employees’ needs. After all, one’s employees’ needs are a company’s most valuable assets, and they deserve a benefits plan that recognizes this.

If we have to accept lower rates of return do we want to be exposed to the same previous level of risk? Currently, there is tremendous volatility in the equity markets and, as a result, many of us are now wondering wether or not we are on the right track with our investment strategies. Given recent developments in the world markets over the past few years, there are other questions we should ask ourselves in order to make this determination.

1. What are my goals?

If we don’t know what the target is, chances are it is going to be difficult to hit. It is important to have an understanding of what we are investing for. Are we accumulating for shorter term goals, such as the purchase of a house, the education of our children? or is the major objective to save for retirement? Perhaps it is a combination of these goals. If we know why we are investing and what the time frame for accumulation is we can determine how much risk is acceptable.

2. What is my risk tolerance?

This probably will depend on where you are in the life cycle. Investors who are in their 20′s to mid 30′s usually tolerate greater risk as they have sufficient time to make up any losses. In the middle years, especially when trying to save while raising and educating our children, steady growth with less risk is often the approach. At retirement, investors usually become extremely risk averse as this is the time that capital is turned into income to replace earnings.

3. What are my retirement needs?

Converting capital into a consistent income might be the objective for the retirement years. For example, if we know what our fixed expenses will be, providing a guaranteed investment income that covers these expenses will help us to enjoy a comfortable retirement.  While GIC’s might guarantee the capital, it only guarantees the interest rate up to the maturity date.  The new Guaranteed Minimum Withdrawal Benefit plans (GMWB) guarantee the cash flow for life while still providing the opportunity to enjoy investment growth.

In the years prior to retirement we pay particular attention to ensure that our investments receive favorable tax treatment. We should not have to abandon that concern in retirement to have safety of our capital. 

4. Are my investments tax efficient?

With a registered plan (RSPs, IPP’s etc.) all investments are treated the same – tax deductible going in (highly tax efficient), totally taxable as income coming out (highly inefficient).  Looking at non-registered investments, usually the higher the risk the more tax efficient the investment.  Pure capital gains are taxed at the lowest rate, guaranteed income (such as a GIC) at the highest rate.  Dividends are taxed somewhere in the middle.  Ideally, it would be extremely beneficial to have the safety of a GIC paying a reasonable rate of return that is guaranteed for life, while at the same time taxed at the lowest possible rate – exactly what the GMWB provides.

There are many types of financial vehicles and most of them are appropriate in the right circumstances.  Employing effective portfolio allocation can ensure that you are not unduly affected by equity volatility, fluctuating interest rates, or high rates of income tax.

Knowing the answer to these four questions should go a long way in determining whether or not you are on the right track.  Having a full understanding of the options available to you is important.

There is nothing as certain as uncertainty.  We live in very turbulent times with respect to the investment climate and developing an investment strategy during this time can be a very daunting and confusing task.  Given that there are now investment vehicles that deal specifically with many of the issues facing investors today, discussion and consultation has never been more important.

Each Canadian must take charge of his or her own retirement. Join us to learn how
you can provide a secure and predictable stream of income so YOU can take charge
of YOUR retirement.

ZLC will be hosting seminars on How to Guarantee Your Income for Life 

Learn how you can:

• Receive a 5% bonus every year until you start taking income
• Enjoy predictable, sustainable, worry-free retirement income guaranteed for life
• Protect your income from market downturns and lock in potential market growth
• Minimize your taxable income and maximize your government entitlements

Check out our different dates and locations.

Reserve your seat now!