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Severance Packages

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

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Severance Packages

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  1. Severance Packages

  2. Objectives • Understand the components of a severance or early retirement package • Explain options and considerations for each • Next steps

  3. Components of Package Generally, the main components are: • Retiring allowance (and termination payment) • Pension assets • Group benefits

  4. 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

  5. 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

  6. 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

  7. 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

  8. Retiring Allowance Example Length of service: 1985-2009 Retiring 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 = $0 Total = $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

  9. 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

  10. 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

  11. 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

  12. 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

  13. 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

  14. Group Benefit Options Types of benefits: • Life insurance • Long-term disability insurance • Health and dental

  15. 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

  16. 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

  17. 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

  18. 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

  19. 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

  20. 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

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