Hello everyone and welcome to the Retiring Canada Podcast. In today’s episode, we're going to discuss the 7 key considerations when retiring from a crown corporation in Saskatchewan.
Specifically, we will cover:
- A brief background on the crowns and their pension
- Understanding your options when you choose to retire
- Optional decisions that can greatly impact how you are taxed
- Weighing the decision to DIY or hire a pro
- A few action items for you to consider
For all the links and resources mentioned in today's episode, please check out the link in the show notes.
Crown corporations have been a part of Saskatchewan’s heritage since before we were named a province in 1905. Over the years, numerous crown corporations have been established, sold, privatized, or dissolved. Today, most Saskatchewanians recognize a crown when they see one. The largest of these crowns, SaskTel, SaskPower, and SGI, represent 80% of the nearly 11,000 employees who work for a Saskatchewan crown corporation.
While all of these crowns perform different functions, there is one common factor they share: nearly all employees participate in the Public Employees Pension Plan (PEPP). PEPP also provides pension planning services for many other non-crown businesses in Saskatchewan. I am sure some listeners have a PEPP pension but don’t work for a crown corporation. Combined, the PEPP plan has an estimated 67,000 members and nearly 12 billion dollars in net assets as of March 31, 2022, according to the 2021-2022 annual report.
Getting back to crown corporation employees specifically, a 2021 crown demographics report stated that 16.8% of staff working at a crown corporation were between the ages of 53 and 59. If we factor in staff over the age of 60, this number swells to around 20%. This means that within the next 10 years, nearly 2,200 of the approximate 11,000 crown staff will retire with a PEPP pension. Assuming that the average PEPP pensioner who has been employed for 20+ years has approximately $750,000 in value in their pensions, this translates to approximately 1.65 billion dollars in retirement assets that Saskatchewan retirees will be responsible for in the near future.
Creating a sustainable retirement income, minimizing taxes, optimizing cash flow, and determining when to start their CPP and OAS benefits all need to be considered when the retirement switch gets flicked on for these PEPP pensioners.
PEPP has done a great job providing resources, workshops, and access to financial planners for their members to help them prepare for retirement. I included a link in the show notes that highlights a lot of what they offer. These resources are a great start and, for the DIY investor, could even be enough support to make it through retirement. The key assumption is that the retiree is willing and able to do most of the heavy lifting throughout their retirement.
Now, before you say, "Hey, they have planners I can talk to," just hear me out. Yes, they do have qualified professionals on staff whose role is to help support nearly 67,000 members. The number of planners and turnover among them isn’t posted on their website, but a quick LinkedIn search for “retirement information consultant” produced only a handful of names.
This is great for all you PEPP members out there. If you don’t have access to a planner, this can be a great start. However, based on the sheer number of members, it may be difficult, if not impossible, to consistently receive the personalized advice that a lot of Saskatchewan retirees crave. Think about it: with nearly 67,000 members enrolled in PEPP, that adds up to 5,000+ families per advisor, a substantial number. Most CFP professionals would agree that around 80-130 households are a good threshold for an individual advisor to provide the proper level of service and advice on a one-to-one basis.
Alright, with all of that, let's get back to the purpose of today’s episode: understanding the 7 key considerations for Saskatchewan Crown employees as they step towards retirement.
# 1. Understanding Your Retirement Income Options
Your PEPP funds are vested and locked-in effective the day you started with PEPP. This means all the funds must stay registered as a pension and are subject to provincial legislation. Upon retirement, you will be posed with the following options:
1. Leave the funds with PEPP and allow them to accumulate (i.e., not starting a retirement income).
2. Transfer out to another institution utilizing a Locked-In Retirement Account (LIRA) or Prescribed Registered Retirement Income Fund (PRIF). The account you choose will depend on whether or not you are starting an income. The underlying investment in these accounts is up to your discretion.
3. Purchase a life annuity from the Saskatchewan Pension Annuity Fund (SPAF).
4. Utilize the PEPP Variable Pension Benefit (VBP). This is very similar to the PRIF option, as both allow you control over how much retirement income is withdrawn.
5. A combination of the above.
The most common options are generally the VBP or the PRIF. These two choices can be boiled down to two key considerations:
- Utilize the Variable Pension Benefit if you are comfortable creating a retirement income stream, optimizing your CPP start date, minimizing taxes, rebalancing your investments, and choosing how your funds are withdrawn, all with a little bit of help from PEPP’s in-house resources.
- If you value professional advice and a personalized approach to creating a retirement income plan that encompasses all aspects of your financial life. This speaks to the personalized and lifetime support you will receive from an advisor who will be with you from start to finish. This option also opens the door to pension-style investing similar to how the Canadian Pension Plan is invested. This style of investing typically reduces volatility for retirement investors, an especially important quality you want in your investments as you start to draw on them for an income. More on pension-style investing later in the episode.
# 2. Group Term Life Insurance to Age 75 and Optional Life Insurance
Another option you may be presented with is whether or not to extend your group life insurance and optional life insurance. Most PEPP retirees will have a paid-up amount of $10,000 that will continue at no cost to the retiree. Beyond that, you will also be presented with the following options which must be addressed within 31 days of your last day of work:
- Group insurance on your life only. It is usually $15 per $10,000 of coverage to a quoted maximum. However, keep in mind the coverage decreases by 10% every year while the premium remains the same (i.e., it gets more expensive as you age).
- Optional life insurance is available for both you and your spouse. You will need to complete a conversion form to get a quote.
For some, this may be the only source of life insurance to provide for a loved one if they were to pass away. Although the cost may be prohibitive to some, it will be important to complete an insurance needs analysis and compare other options before choosing to accept or decline these benefits.
# 3. Company Service Pay (Severance)
Also known as a "retiring allowance," this amount is a lump sum that is paid to you as part of your retirement package. The amount consists of eligible and non-eligible amounts:
- Eligible Retiring Allowance: Can be added into an RRSP with zero impact on your RRSP contribution room. A TD2R, Direct Transfer of Eligible Retiring Allowance form will need to be completed by you or your advisor to move the funds to an RRSP.
- Non-Eligible Retiring Allowance: Can be rolled into an RRSP depending on your available contribution room. Any amounts exceeding your available contribution room must be taken as cash with taxes deducted at source.
- All in Cash: If you choose to take both amounts as cash, the full amount will be considered taxable income in the year it is received. Taxes will be withheld and remitted to CRA.
For most, it will make sense to defer the payment of tax by sheltering these funds in an RRSP and controlling the amount of tax payable in the future. When it comes to the excess amount that is unable to be deferred in an RRSP, consider this: if you are choosing to retire in either December or January, I would strongly suggest January. That way, any excess amounts received would likely attract a lower marginal tax rate. If you retired in December, your employment income up to that date would significantly increase your taxable income.
This could result in the loss of pension benefits (i.e., OAS Recovery Tax, which is an effective 15% increase in tax). Also, consider utilizing a spousal RRSP to shift taxable income to your spouse in the future. This strategy gives you the tax deduction and provides some retirement income benefit to your spouse in the future. This is especially important for PEPP members, as in many instances the PEPP member has a significant pension while the spouse may not have as much in registered assets. Considering this strategy now can have tremendous tax reduction potential in the future.
# 4. Superannuate Health Care Plan
Within 31 days of your last day of work, you will have the option to continue health care coverage. Upon retirement, you will receive a welcome kit with enrollment instructions.
During this time, be sure to compare other third-party options to ensure you get the benefits you need at a competitive price. A few other things to consider when making this decision include:
- Does my spouse still have coverage? Is it comparable?
- Should I just self-insure during retirement (i.e., pay for healthcare costs out of pocket)?
- Do I plan on traveling?
# 5. Other Components of Your Retirement Benefit Package
There are a few other items you should know about when you receive your retirement benefit statement, including:
- Flexible Spending Account: Your annual entitlement is prorated to your last day of work. Any amount remaining can be used within 60 days of retirement.
- Deferred Salary Leave Account: If you are participating in the deferred salary leave program, your funds will be refunded and paid out to you as a lump sum.
- Earned Deferred Salary: You may have the option of receiving these funds through payroll or as a lump sum. If you choose payroll, it will be paid in 12 equal installments and paid as an advance in the event of death or resignation.
# 6. Transitioning from Saving to Spending
If you’ve saved and invested during your working years, you’re likely in the mindset of accumulating as much as possible. This is very common for those with defined contribution plans, such as PEPP, and generally leads to a lifetime of good savings habits. When you choose to retire, your mindset will need to change from accumulation to de-cumulation (i.e., spending down your assets).
This transition can be difficult for some and will require additional planning to help you understand what is an appropriate amount of income to draw in retirement. While PEPP’s resources are a great start, you will need to consider other sources of income to ensure you don’t run out of funds. If you have not already, I suggest you complete a comprehensive retirement income plan to forecast all your sources of income and outline your spending goals throughout retirement.
# 7. Optimize Your Income, Taxes, and Investments
Lastly, all of this would not be complete without highlighting the importance of how to maximize your income, reduce your taxes, and optimize your investments. This takes a lot of careful planning, and as a DIY investor, you will need to be comfortable with these key considerations. Here are a few questions to ask yourself:
- Have I considered how and when to draw down my PEPP, RRSPs, LIRAs, non-registered, and TFSA accounts?
- When should I start my CPP and OAS?
- Am I familiar with pension-style investing?
- What is my strategy for keeping up with inflation?
- Have I completed a life insurance needs analysis?
If you are comfortable with these questions, you may already be ahead of the game. However, if you are unsure of where to start or are uncertain of how you will optimize your retirement income, it may be best to hire a professional. A financial planner or wealth advisor can provide you with ongoing support and tailored advice throughout your retirement.
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Thanks for joining us today on the Retiring Canada Podcast. I hope you found our discussion on the 7 key considerations for retiring from a crown corporation in Saskatchewan helpful. Don’t forget to check the show notes for links to additional resources and information.
Until next time, happy planning!
Links to sources:
All comments are of a general nature and should not be relied upon as individual advice. The views and opinions expressed in this commentary may not necessarily reflect those of Harbourfront Wealth Management. While every attempt is made to ensure accuracy, facts and figures are not guaranteed, the content is not intended to be a substitute for professional investing or tax advice. Please seek advice from your accountant regarding anything raised in the content of the podcast regarding your Individual tax situation. Always seek the advice of your financial advisor or other qualified financial service provider with any questions you may have regarding your investment planning.