RRSP contributions sagged in 2002

(October 23, 2003) Canadians are not taking full advantage of the tax savings offered by investing in an RRSP, according to a report from StatsCan.

The number of Canadians who contributed to their RRSP dropped by 4% to 5,991,440 last year, but the drop in the amount they invested was even more significant. Total contributions were down 4.8% to $27.1 billion. By comparison, 2000 saw a record of 6,291,170 investors contribute $29.3 billion.

“RSP contributions are really the most tax-effective and -efficient way of building your retirement resources,” says Debbie Ammeter, vice-president of advanced financial planning at Investors Group. “People have to keep that in mind.”

She says that given the condition of the market since 2001, it was not surprising that investors have shied away from investing in general. Ammeter says a poll conducted by Investors Group in October 2002 showed that 62% of respondents were less enthusiastic about investing, so a drop of 4.8% in contributions does not come as a shock. A similar poll conducted this year indicates 29% plan to contribute more to their RRSP.

“I think that people should look at what the advantages would be if they used up some of their unused contribution room. While they can appreciate that there is some tax advantage, they don’t necessarily sit down and have someone calculate for them what it really means for them.”

The StatsCan report says that tax filers used a paltry 9% of the available limit on contributions in 2002, leaving roughly $274 billion of unused space. Eighty per cent of those filing taxes had room to contribute to their RRSP, but only 34% did so.

Ammeter says one way to combat the growing backlog of unused contribution room is to encourage your client to make a regular deductions from their paycheque.

“They’ll get used to that pretty quickly,” she says. “You tend to adjust to living within your take-home pay anyway and you won’t have that panic situation in February, when you don’t have the cash to put away.”

Besides the lack of market confidence, another possible explanation for the drop in contributions is that low interest rates are encouraging people to invest in real estate instead of traditional investments like mutual funds, bonds and equities.

“My concern is that people are always investing in a balanced portfolio and not chasing this year’s hot investment, which often shows a decline the next year,” she says. “You really should be working with an advisor who can help you determine what mix of equities, fixed incomes and real estate you should have in a portfolio to give you the best blend and the best risk-adjusted return that you might need.”

Are your clients maxing out their RRSP limit every year? Have any tips on how to convince a reluctant client that they should contribute? Or do you think RRSPs are over-rated and inefficient? Share your thoughts about this topic in the Talvest Town Hall on Advisor.ca.

Filed by Steven Lamb, Advisor.ca, slamb@advisor.ca