Severance Packages

Objectives

• Understand the components of a severance or early retirement package

• Explain options and considerations for each • Next steps

Components of Package

Generally, the main components are: • Retiring allowance (and termination payment)• Pension assets• Group benefits

Considerations

• Retiring Allowances – Tax consequences

• Pension Assets– Monthly income or lump sum– Pension Adjustment Reversal (PAR)

• Group Benefits– Life insurance– Long-term disability insurance– Health and dental

Retiring Allowances

Definition• an amount received on or after the retirement of an

employee in recognition of long service, or in respect of a loss of office or employment

• includes: pay for unused sick leave or damages (such as those paid for wrongful dismissal)

• excludes: pension benefits, amounts paid for unused vacation, payments given in lieu of termination notice

Source: Canada Revenue Agency

Retiring Allowance Options

One-time tax opportunity• May be able to roll over part of your retiring

allowance to your RRSP on a tax-free basis -- without using up your existing RRSP contribution room

Retiring Allowance Options

Amount eligible for tax-free rollover to RRSP: • $2,000 for each calendar year or part year of

employment up to but not including 1996• additional $1,500 for each year or part year before

1989 (during which you did not earn benefits in a registered pension plan or deferred profit sharing plan)

• for years after 1995 – no preferential tax treatment

You can use existing personal RRSP contribution limits to shelter the excess

Retiring Allowance Example

Length of service: 1985-2009Retiring allowance: $100,000

1985-1995 = $22,000 (11 yrs, incl. 1985, x $2,000)1985-1988 = $6,000 (4 yrs., incl. 1985, x $1,500)1996-2009 = $0Total = $28,000 to RRSP without affecting contribution room

+ $25,000 of unused RRSP contribution room $53,000 can be tax sheltered while

$47,000 will be subject to tax

Additional Tax Tips

• Ask employer to deposit eligible retiring allowance directly into your RRSP so taxes are not withheld

• Arrange with employer to delay and possibly spread out payout over several years (up to three) to reduce tax impact

Pension Options

If you are a member of a registered pension

plan, you will likely have three choices:• keep your pension with your previous employer• move it to a new employer’s pension plan, or• transfer the lump sum value of the pension

(commuted value) to a Locked-In RRSP or, if you are retiring, to a Life Income Fund or Locked-In Registered Income Fund

Pension Options

• Monthly pension or lump sum (commuted value) depends on hard and soft factors

• quantitative analysis of two options• willingness to manage your financial affairs• life expectancy • desire to leave an inheritance• whether pension is indexed to inflation• importance of continued health benefits• other assets

Annuities

May be appropriate for part of assets: • if you seek regular income either for life, like a

pension, or for a predetermined number of years

How they work: • purchased with one-time lump sum payment• payments include both principal and interest• if non-registered funds, can obtain tax advantages

with certain types

Pension Adjustment Reversal

• Can you benefit from a PAR?• if transfer pension assets to locked-in RRSP and

belonged to a defined benefit pension plan• creates additional RRSP contribution room• can be used to shelter ineligible retiring allowance

Group Benefit Options

Types of benefits:• Life insurance• Long-term disability insurance• Health and dental

Group Benefit Options

Life insurance • may be able to convert existing life insurance to

personal policy without proof of health• within 30-60 days• valuable option if serious health issue whereby you

may not be insurable any longer• if healthy, may be more cost-effective to find an

alternative policy

Group Benefit Options

Long-term disability insurance• not portable• may want to consider obtaining a personal disability

insurance plan to ensure your income going forward• next employment may offer this

Group Benefit Options

Health and dental benefits• may be offered in same format as before or on a

modified basis • as part of package, may be for an extended period of

time• at a minimum, coverage will likely be 30 days

How We Can Help

Review financial plan and goals• explain severance options• gauge impact on your financial plan and dreams• reassess cash flow needs against desired lifestyle

and available resources• may have to reprioritize goals• review estate and insurance plans • determine how to invest payout

Portfolio Management System

Access to unique process: • efficient portfolio design using a pension-like

approach• selection of independent investment specialists • regular monitoring of investment specialists• automatic portfolio rebalancing

Next Steps

Personal financial advice is critical• each one of you have very different circumstances

and aspirations• it’s crucial that you discuss each consideration with a

certified financial professional • be sure to update your financial plan to meet your

recent changes• book a meeting with my team before you leave today

and we will ensure you make the best decision for you