Thursday, 29 June 2017

Pension and Insurance Revisited

For those lucky enough eligible to receive benefits from a Defined Benefit pension plan,  a decision will sometimes have to be made to either receive monthly pension payments or commuted value/lump sum payments (CV).

Let me summarize for you the pros and cons as I see it.

Pros of receiving monthly pension payments

Certainty of payments each month.

Amount guaranteed by PBGF up to a maximum of $1,500 with the new proposal in Ontario.


Payment stops when the pension dies unless the Joint and Survivorship (J&S) option is selected (in which case the surviving spouse continues to receive pension payment at a lower amount).

Selecting the J&S option also means a reduction of almost 30% in pension payment in some cases.

PBGF guarantees a maximum of $1,500 in pension payment. If the pension plan performs poorly and  the company is not able to fund the pension plan, any benefits above $1,500 may not be paid.

Once the pensioner dies, and if there is no J&S option available, no further payments will be made.

On the other hand, one may be able to choose to receive CV, which is layman terms means a lump sum payment based on the present value of pension benefits earned,  

Summary and recommendation

My suggestion, being both a CFP and a qualified Life Insurance professional, is to purchase a whole life insurance policy that can be fully paid off in 10 to 20 years as soon as one can walk if one opts to receive monthly pension benefits without the J&S option.  The advantage is that the monthly pension payment is 30% more than the pension with J&S option, and even if one passes on, the surviving spouse/beneficiary receives the insurance proceeds tax-free. 

Based on some quick math, a 10-year $100,000 whole life policy probably cost $1,600 a year for a 21 year old and will be paid off in 10 years.   A 30% reduction on monthly pension payments based on a $2,000 monthly pension  is  about a $600 reduction. As such, the breakeven point is about 2-3 years. Again, in layman terms, if you had purchased the insurance policy way back, you can have the assurance that after 2-3 years, you will come up ahead by not opting for the J&S option.

Pros of receiving CV

Depending on the monthly benefits one is entitled to and his age , the pensioner may be able to transfer a portion or all of the CV to a Locked In Retirement Account or Life Income Fund.  This will be suitable to someone who can make his own investment decision on what to invest it.  More importantly, one can preserve the principal unlike a monthly pension payment that will stop when one dies (assuming no J&S option  is selected)

The typical amount is based on the Income Tax Act, but is generally based on the Annual Benefit multipled by a factor of 10 and above.  For instance, if one is entitled to $20,000 of annual pension benefit, one can transfer up to $200,000 to a LIRA based on a multiplier of 10,  The remaining CV balance, if over $200,000, will be taxable.

In addition, if the whole amount is transferred to purchase an annuity, the whole amount will be taxed free. The advantage is that annuity payment received from insurance companies are guaranteed up to $2,000 per month or 85% of the monthly benefit, whichever is higher.  If you were to ask me, I would rather trust the insurance company over the company paying the pension since PBGF only guarantees payment up to $1,500, which is up from $1,000 .

As indicated above, only a portion of the CV can be transferred in most cases, and the balance is taxable at the marginal tax rate. 

Summary and recommendation

Again, my suggestion, being both a CFP and a qualified Life Insurance professional, I would recommend that one should always purchase whole life insurance policy as young as possible, and pay off the policy as soon as possible. The benefit is that the policy can be used to provide reassurance to your dependents in the initial years, while serving as an estate preservation tool at your latter years.

Secondly, do seriously consider the CV option even though there are some tax consequences because of the principal preservation nature as the amount you can move tax free to a LIRA is under your control as   it can be used to generate investment income and possibly growth., while still maintaining the principal amount. 

Thursday, 22 June 2017

Minimum Wage in Ontario

While I appreciate the Ontario Liberal’s Party intention to increase the standard of living for lower income wage earners by increasing the minimum wage to $15 an hour effective January 1, 2019, I can’t help but wonder if the plan is going to succeed, never mind the hundreds of thousands of dollars wasted invested paying consultants to justify the idea in the first place.  

Don’t get me wrong. I am all for paying someone a decent wage, but this is the incorrect approach.

By increasing the minimum wage, you must also increase wages at all levels to keep pace. Otherwise, it creates a disincentive. Take for example, wages for a lifeguard. Depending on which city or private facility you work for, the current wage starts at $13 an hour. Do you know the amount of time and investment required to qualify as a lifeguard, and the requirement to maintaining your qualifications through continuing certifications?  I know that for a fact because both my daughters used to be lifeguards, but stopped as soon as they went to university and found better paying positions. This is also why there is a shortage of qualified lifeguards because of the disparity in pay to the minimum wage standards, which have risen considerably over the years, while the pay scale for lifeguards has stagnated.  

Who wants to spend all the money to be a lifeguard when you can make more money working at McDonald’s?  Guess what, you may not even get a minimum wage job at McDonald’s that easily. Just take a look at the number of self-ordering kiosks that have sprung up lately.  

In addition, small business owners and retailers suffer the most as they will not be able to pass on the increased cost of payroll to consumers easily. To make ends meet, they must reduce the number of hours or eliminate workers. The business owners are the true risk takers, and if Ontario wants to continue to encourage entrepreneurship, increasing minimum wage to such levels will be counter-intuitive.

The only way to increase one’s standard of living is not by waiting for handouts. One must upgrade one’s education, skills and be relevant in this changing world. The gap between the haves and have nots have widened.  But sadly, our government policies have not kept pace.  Life is tough, suck it up!  

The Wealth Effect

I watched a documentary on TV Ontario last night called “The Super-Rich and Us.”  Shot mostly in London, England, Jacques Peretti investiga...