Class Notes (1,100,000)
CA (640,000)
Western (60,000)
AS (70)
Lecture 3

Actuarial Science 1021A/B Lecture Notes - Lecture 3: University Of Western Ontario, Pension, Canada Revenue Agency


Department
Actuarial Science
Course Code
AS 1021A/B
Professor
Steve Kopp
Lecture
3

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NOTE: EE-Employee ER-Employer
Turning RRSP’s into Retirement Income
You may contribute to an RRSP up until December 31 of the year in which
you turn 71 used to be 69 after this point you must start withdrawing money
from the RRSP
RRSP money may be transferred to a retirement income plan at any
time
but latest it must be done is by the end of the year in which you turn
71
That is, by the end of the year in which you turn 71, you must convert your
RRSP into one of the 4 options given below:
(1) Lump sum cash payment
Would be fully taxable immediately with a 20% withholding
tax
The remaining 3 options allow you to transfer your RRSP money, tax free, to
another retirement income product:
(2) Buy a life annuity
specified monthly income which is guaranteed for life of
individual
monthly income is taxable income
This used to be the only choice, but in 1978, amendments were made to the
income tax act to include the final 2 options:
(3) Registered Retirement Income Fund (RRIF)
introduced to allow more control over the investment of
the fund
gives more flexibility in the timing of the withdrawals
CRA states what the minimum monthly RRIF payment
can be
you may choose a higher benefit

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RRIF is basically a reverse RRSP, in that the money
grows tax free; money is taxed upon withdrawal
You can convert a RRIF to a life annuity at anytime but
no the other way around
(4) Annuity Certain
term = 90 - age of annuitant
gives a specified monthly income that is guaranteed to
age 90
RRIF Minimum Payouts
Age Minimum withdrawal %
71 7.38%
72 7.48%
73 7.59%
74 7.71%
75 7.85%
: :
93 17.92%
94
or
older
20.00%
If an individual has an RRIF when he/she is under the age of 71, the
minimum payout is determined by:
min % = 1 / (90 − Y)
where Y = age at beginning of year in
which you withdraw from RRIF
RRIF Example
Suppose at age 69, you transfer $200,000 of your RRSP money to a RRIF.
What would be the minimum monthly payments for age 69, 70 and 71?
(assume an annual interest rate of 4%)
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1 Min. annual Withdrawal at age 69 = 1/90-69 = 0.0476
Withdrawal = 200000(0.0476)=96520 we assume that this is withdrawn at
start of the year
Monthly/12 = $793.3
Balance at age 70 = (200000-9520)(1.04) = $198,099.20
(II) Employer Plans
There are 2 main types of employer plans:
1. Registered Pension Plans (RPP’s)
2. Group RRSP’s
3. Deferred Profit Sharing Plans (DPSP’s)
1. Registered Pension Plans
Employer (er) pension plans are designed to provide a monthly income for
employees (ees) upon their retirement
® they are generally low cost to the (er)
due to favourable tax treatment
® a good pension plan can help recruit
and retain workers
by an RPP
This means 61.6% of workers have no pension plan
there are 18,236 as the end of 2012 RPP’s, covering about 6.2 million
employees
total assets in RPP’s > $684 billion
total benefits have increased from $5.2 billion in 1982 to over $45
billion in 2010
An RPP must be:
registered with Canada Revenue Agency (CRA) AND
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