Budget tests client retirement assumptions

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There’s no question, the biggest piece of news out of the federal budget is increased age at which Canadians will qualify for Old Age Security payments. The good news is that the government has given plenty of notice.

The decision to delay OAS payments until age 67 will require advisors to rethink all financial models and retirement savings plans to look at how much clients are saving and when they can expect to start receiving government money,” ” says Jamie Golombek, managing director of tax and estate planning at CIBC Private Wealth Management.

The phase-in period ensures no one currently receiving OAS payments will be affected. There’s an 11-year notification period, followed by a six-year phase-in period, so the changes won’t begin to come into effect until 2023, and won’t be fully implemented until 2029.

“They’re giving people a lot of notice, but I think it’s critical for financial advisors to step up and look at how these changes might impact their client,” he says. “It’s a generous phase-in, but to go much sooner could be very detrimental to people’s planning.”

Those first to feel the impact may believe implementation comes too soon, but Golombek says the government’s timing represents a fair balance between citizens’ needs and the reality that government must rein in costs.

While the OAS changes will get the most coverage in the mainstream media, other budget items that may go overlooked will affect financial advisors, including changes to address what Golombek calls “somewhat questionable planning” that has been done by some Canadians.

“They’re looking at potential abuses to the use of retirement compensation arrangements (RCA),” Golombek says, pointing out that a few years ago, the CRA sent out detailed questionnaires to private companies that used RCAs. “There have been various methods used. Some involve life insurance, where you get massive deductions to the RCAs, and the money gets funneled back to the contributor through a series of steps,” he explains. “They’re putting rules in place to put a stop to abuse in that area.”

The budget tries to close loopholes that allowed similar abuses in employee profit sharing plans, which had increased five-fold between 2005 and 2009.

“Many small business owners have been setting these up for themselves and family members to allow income splitting and avoid paying into CPP and EI,” he says. “There’s a new rule coming in to limit the amount that you can put into an EPSP for yourself and family members.”

Also buried in the budget are new rules governing how much of a savings component can be held within a life insurance policy.

“That policy hasn’t been updated since 1982,” says Golombek. “They’re updating mortality tables, life expectancy and interest rates, which could affect the ability to save within a life insurance policy.”

This update is probably aimed at abuses the government spotted in the use of “quick-pay” UL policies, in which the premiums are all paid up-front.

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