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Normandin Beaudry

Rethinking the role of retirement savings

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There, in black and white

NB bulletin Vol. 16 N. 9, June 2013

Out of the 21 recommendations issued by the Expert Committee on the Future of the Quebec Retirement System (the “Committee”), chaired by Mr. Alban D’Amours, four are related to retirement savings plans other than defined benefit plans. The goal of these recommendations is to help workers save more for retirement and to make the Quebec retirement system more effective.

Many workers who do not have access to a defined benefit pension plan offered by their employer must rely more on retirement savings plans and their personal savings to ensure their financial security at retirement.

This information bulletin focuses on the recommendations related to retirement savings plans.

Voluntary retirement savings plans (VRSPs)

The first recommendation aims to make savings more effective for all workers and involves the swift implementation of VRSPs by the Quebec government. The Committee’s recommendation on VRSPs became reality with the tabling of Bill 39 on VRSPs on May 8, 2013. To learn more, click here to access our bulletin on VRSPs.

Greater flexibility in the withdrawal of retirement savings

The Committee’s other three recommendations involve making the withdrawal of retirement savings more flexible, particularly for defined contribution plans, locked-in retirement accounts (LIRAs), life income funds (LIFs) and registered retirement savings plans (RRSPs).

Benefits paid directly from a defined contribution plan

First, the Committee proposes amending the Supplemental Pension Plans Act to allow defined contribution plan members to receive pension benefits directly from their plan. Members could thus continue to benefit from the advantages offered by their group plans, such as lower management fees.

Because federal tax provisions already allow for the payment of benefits, provincial legislation would simply need to follow the lead of the other Canadian provinces 1 to make the payment of benefits from defined contribution plans more flexible.

Earlier withdrawal of retirement savings

The Committee also proposes allowing funds held in a LIRA or LIF to be withdrawn as early as age 60. The maximum withdrawal amount would be revised accordingly. This additional flexibility would allow workers to “rethink” the use of retirement savings.


The payment of QPP and OAS benefits
can be deferred up to age 70.
For each year that payment is deferred,
the QPP and OAS benefits are increased by 8.4% and 7.2% per year
respectively starting at age 65.
It should be noted that QPP benefits
are reduced when paid before age 65.
OAS benefits cannot be paid before age 65.


As an example, the tables below present the maximum QPP and OAS benefits with payment deferred to age 70. It should be noted that the total benefits payable from these plans could exceed $26,000 per year.

By combining the earlier withdrawal of retirement savings and the deferral of increased benefits payments from the Quebec Pension Plan (QPP) and the Old Age Security Pension (OAS), workers could:

  • Simplify retirement planning: alleviate the pressure on retirement savings by planning primarily for needs for the first few years of retirement.
  • Pool longevity risk: rely more, at older ages, on the strength of public plans that resides in the pooling of longevity risk while enjoying defined benefit payments.

The chart below illustrates the impact of a withdrawal strategy that combines the earlier withdrawal of retirement savings (starting at age 60) and the deferral of increased QPP and OAS benefits payments up to age 70. This example is based on a salary of $50,000 before retirement and a retirement income of $30,000 per year (left axis), or a salary replacement level equal to 60% of the pre-retirement salary (right axis).

Retirement savings withdrawal strategy

The implementation of this type of retirement savings withdrawal strategy is already possible for workers with savings from RRSPs or TFSAs. The longevity pension proposed by the Committee that would be paid starting at age 75 is not illustrated above. The longevity pension would further pool the longevity risk and alleviate the pressure on retirement savings. Click here to learn more about the longevity pension.


For most Quebec workers,
the required retirement savings amount should be equal
to the annual income targeted at retirement multiplied by the number of years
between the retirement age and age 70.


For example, the table below illustrates the estimated retirement savings amount required for a target annual income at retirement of $30,000, assuming a retirement at age 60 and age 65 and the deferral of increased QPP and OAS benefits payments.

This type of retirement savings withdrawal strategy could also be applied to workers having higher income objectives. However, at older ages, the retirement savings would still represent an important source of income.

Push back the RRSP conversion age

The Committee’s final recommendation is to push back from age 71 to age 75, the maximum age at which the RRSP must be converted to a registered retirement income fund (RRIF) or to an annuity purchased from an insurer. This change aims to achieve harmonization with the longevity pension that would be paid starting at age 75 and will not be possible without the support of the federal government.
 

 


1 Alberta, Manitoba, Saskatchewan and British Columbia already allow for the payment of benefits from defined contribution plans. Ontario, New Brunswick and Nova Scotia have also tabled bills that seek to do the same.
2 This example does not take into account planned changes to the OAS. The Canadian government has introduced measures to gradually increase the OAS eligibility age between 2023 and 2029. The age will be changed from 65 to 67, and individuals will still be able to defer the payment of OAS benefits for up to 5 years, or age 72 starting in 2029.
 

 

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