What is it?
A pension plan is an annuity that is a tax-deferred investment vehicle packaged as an insurance product. A retirement plan / pension plan is offered to individuals and pays a fixed amount each month during retirement. If registered with the department of the Inland Revenue, the contributions made to the plan up to a maximum of $4,000 annually are tax deductible.
When you buy a pension plan, its earnings are tax-deferred until you begin withdrawing the money. Because you are not paying taxes along the way, you have the chance to earn gains on untaxed money, and it grows much more quickly.
An annuity basically has two phases: the accumulation phase, and the distribution phase. During the accumulation phase, you can contribute as much as you want and the earnings in the annuity grow tax-deferred. During the distribution phase, you turn your annuity into a stream of monthly cheques for life or a chosen certain period of time.
The security of knowing you will get an income for a specific period, or for life, is one of the real advantages of owning a pension plan. Distributions and withdrawals may become subject and are generally taxed as income.
These plan are also referred to as a Registered Retirement Plan (RRP) and when used in conjunction with a Registered Retirement Savings Plan (RRSP) provides an individual the ability to claim a maximum of $6,000 off of their personal income tax return..
Certain Period or Life?
If the payout phase of an annuity is for life, it pays the owner during his or her entire lifetime. The payments cease when he or she dies. If an annuity’s payout is “certain,” it pays the owner for a specified period, and if the owner dies before the period ends, then a beneficiary receives the payments until the certain term ends. In other words, if the annuity owner has a certain term of 10 years for an annuity but receives only 5 years of payments before dying, then the owner’s beneficiary will receive payments for another 5 years, after which the payments would cease.
An annuity can also be a combination of life and certain terms. For example, you can purchase an annuity for “life,” but with a certain period of ten years. If you live longer than the ten-year period, the annuity continues to pay throughout your lifetime, and at your death, the payments cease. If you die before the certain term expires, your beneficiary will receive payments until the certain term ends.
Remember if the annuity is registered with the department of Inland Revenue, the contributions made to the plan up to a maximum of $4,000 annually are tax deductible for the individual and 15% of pensionable emoluments.
Retirement Q & A
Q. What will your expenses be after you retire?
A. You can figure on about 75 percent of your pre-retirement income as a reasonable estimate. Your actual expenses, however, can vary a great deal. You are likely to spend much less on transportation and clothing. Your tax rate also may be much lower to zero. Your housing cost will drop considerably if by then you have paid off your mortgage.
Some retirees discover that they spend more than during their working years because they have the time to travel around the world. Medical expenses also take a toll. To get an accurate handle on what your actual expenses are likely to be, you should “run the numbers”. That will give you an opportunity to adjust your expectations or your contributions to your retirement plan.
Key Benefits of Annuities
- Earnings grow tax-deferred until withdrawal
- Receive specified amount of income during retirement
- Contribute as much as you want during the accumulation phase
There are special tax advantages for investing in a Registered Pension Plan. An annual tax allowance of up to $4,000 can be deducted from your income.
N.B Taxation is a complex subject, and whilst every care has been taken to present these highlights, no decision should be taken based on it without professional advice.
At Field Insurance Brokers Inc. we can determine the type of plan that best suits your needs after an analysis. We are here to help you understand your policy and if you are not clear on any area please do not hesitate to ask your Account Representative.
No matter how old you are, it is time to start thinking about and saving for retirement.