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Pension transfer by surviving spouse

I have a client whose wife was a retired teacher, and recently passed away. My client, has been discussing options with the Saskatchewan Teachers’ Federation (STF). They will give him $1,300/month for the rest of his life, but when he passes, any remaining value cannot be passed on to the children. He can take a lump sum payout of $375,000, but they say it will be taxable – shouldn’t he be able to transfer this to a RRIF or annuity?

Assuming that the relevant plan is a DBPP(Defined Benefit Pension Plan):
.
No.
Generally, when a person STARTS their (DBPP) pension, the relevant pension fund society will give options, including a lump sum payout. On that same options letter, the pension fund society will advise if any portion of it is eligible for transfer to RRSP/RRIF.
I am surprised that they are giving him NEW offer of lump sum payout, since the options are generally fixed at START of pension. Regardless, unless the pension fund society produces documentation for any part of it to be eligible for RRSP rollover, ALL of the amount will be included in taxable income in the year received.
Unless the survivor has received something like a life-shortening cancer diagnosis, why would he not want the guaranteed, risk-free, monthly annuity for life that they are offering? (Presumably he is not planning on killing himself within approx 12 years for the purpose of leaving a balance to the “children”, although, who knows, maybe he is…).

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I think after calculating roughly, I would take the payout, pay the tax and invest the balance wisely. Unless he outlives his wife by more than approx. 12 years, he will have more by taking the lump sum.

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This is commonly called a pension commute and done quite regularly. We do these commutes quite a bit. The amount that must be transferred is into a LIRA (Locked in Retirement Account). There are a lot different rules that govern a LIRA than a RRSP. The amount that must be transferred into a LIRA is a tax free transfer as your will be taxed upon withdrawal. You have no choice in a commute but to transfer this qualified amount into a LIRA. The remaining amount that does not qualify for a LIRA is taxable. You can offset that taxable income by directing funds into an RRSP if your have contribution room. Therefore the RRSP is optional, but I am not sure why you wouldn’t use it. All funds that fall outside of the LIRA and RRSP are taxable at what ever tax bracket you fall into at the time, which is usually quite high.
Why would you do such a thing and pay such high tax? Estate Planning is number 1, number 2 if you think the pension plan is underfunded or in trouble of collapse (i.e. Company is going into bankruptcy).

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Thanks for the help guys. @tim1 does it matter that my client is now 73? I have been doing some research re: LIRAs, LIFs, and commuting - I can’t find specific mention of an age limit, but it sounds like the “commuting period” is set by the pension company. If that is the case, and the STF says “too late”, is he stuck paying tax on the withdrawal? Any other options, you think?

Yes it matters Nezzer. A LIRA must be collapsed and converted into a LIF or Annuity by December 31st of the year the client turns 71. In your specific case there would definitely be no option to transfer the remaining proceeds of the spouse’s RPP into a LIRA, the surviving spouse is simply too old.

A lump sum offering from an RPP that has already been paying monthly benefits to the pensioner is generally only offered when when the pensioner dies within the “guaranteed period”. As Joe mentioned, if the teacher was married at the time she started receiving her pension, the spousal options would have been selected at that time, as her selection would have impacted her monthly payment amount from the beginning.

In any event, the fact that your client is being offered a “Lump Sum” means that there is no “locking portion” in that amount. In my mind, if you are offered a Lump Sum, but wanted it to be transferred on a tax sheltered basis, there shouldn’t be any restriction that it be transferred to any type of “locked in” plan.

You are generally permitted to have the Lump Sum proceeds of your spouse’s RPP transferred directly to your RRIF upon the death of your spouse. The maximum available for transfer could still be subject to the Maximum Transfer Value as imposed by ITAR 8517, however, the Pension Administrator would calculate any MTV if applicable.

I don’t know why your client hasn’t been given an option to transfer the Lump Sum to his RIF, or why (as Joe mentioned) this wasn’t all sorted out prior to his wife receiving her first pension payment, but in my mind, the first step would be to contact the STF Pension Administrator and ask whether a tax free transfer of the Lump Sum is an option, and if not, why not. If a transfer is available, it must be done by the Pension Administrator directly, meaning he can’t take the Lump Sum and then contribute that to his RIF.

Here are a couple of links that may or may not be useful.

https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/rrsps-related-plans/transferring/registered-pension-plan-rpp-lump-payments.html

https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/registered-retirement-income-fund-rrif/transferring-your-rrif/rpp-dpsp-lump-payments.html

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Thanks, Wayne! Much appreciated.

@Nezzer

I would run a scenario analysis with life expectancy as the variable for scenarios. Then let the client weigh the options depending upon his circumstances.

TO BE CALCULATED BASED ON FULL ESTIMATED INCOME
After tax proceeds of Lump Sum vs Lifetime Benefit.

Scenarios
Life expectancy to 70
Life expectancy to 75
Life expectancy to 80
Life expectancy to 85
Life expectancy to 90
Life expectancy to 95

Lump sum of $375,000
Net after tax proceeds of ?

Before tax lifetime annual income of $1300 * 12 = $15,600
Before tax lifetime annual income of $15,600 @ 5 years = $78,000
Before tax lifetime annual income of $15,600 @ 10 years = $156,000
Before tax lifetime annual income of $15,600 @ 15 years = $234,000
Before tax lifetime annual income of $15,600 @ 20 years = $312,000
Before tax lifetime annual income of $15,600 @ 25 years = $390,000

TO BE CALCULATED BASED ON FULL ESTIMATED INCOME
After tax lifetime annual income of $1300 * 12 = $15,600
After tax lifetime annual income of $15,600 @ 5 years = $78,000
After tax lifetime annual income of $15,600 @ 10 years = $156,000
After tax lifetime annual income of $15,600 @ 15 years = $234,000
After tax lifetime annual income of $15,600 @ 20 years = $312,000
After tax lifetime annual income of $15,600 @ 25 years = $390,000
etc

@Nezzer

I would check the legal document and/or the plain English text outlining and detailing the pension income and survivor options.

Some pension income benefits which are administered by Life Insurance Companies rather than by regular fund manager have some unusual and quirky options. The only way to know for sure is to obtain a copy of both the legal agreement and plain English summary with FAQ’s and rulings if available.

Thanks, @dominique_dabolczi. The client has already done this analysis himself - he is 73 and expects to live another 15-17 years. He would “lose” about $100,000 that could be passed on to his children if he takes the $1,300/month option. But, if takes the lump sum and can’t offset the tax payable, he will lose about half of it to taxes.

I haven’t seen the documentation, and not planning to ask for it. Just wondering if there is a way to prevent the lump sum from being taxable, or at least offset some of it. I will give him the info re: transferring to a RRIF, and let him ask the STF pension administrator if that can be done.

@Nezzer

Lump sum and/or monthly survivor may be non-taxable.

Case 1 - Private Day Care Pension survivor benefit
The only way to know for sure is to check the original pension contract of the recipient. That is what I did to defend my tax client during a CRA audit during T1 matching. My client claimed that the amount was non-taxable income for ten years as the named survivor for his mom. I checked with the employer. The employer sent me to London Life. London Life sent me the survivor a copy of the pension and the survivor benefit agreement. London Life clearly detailed the survivor’s eligibility and the fact that the survivor income was non-taxable and why. In this case it had to due with the fact that it was part of combined insurance and pension policy similar to a SEG fund. The fact that had been the chief on a reserve and running the day care was irrelevant. The fact that her son was off reserve was irrelevant. My client passed audit. In this case it was a fixed 10 year payment term of non-taxable income. There would have been no way to determined this without the source documents and tax relevant descriptions.

Case 2 - Calgary Board of Education and Alberta Health
In an about the mid 2000’s there were an number of issues with retiring allowances and pension payouts. The slips did not match the pension and retiring allowance descriptions. We wrote the employer(s) to ask for correction or clarification. After about six months new slips were issued and lump sum benefits were corrected. Again, the only way to know your option is to study the details.

Conclusion
Ask the client to obtain the source documents. It seems that your client is able to do at least that. Read and summarize the facts. Ask questions of the pension administrator. Ask questions of a CRA resource officer. Research. There are lots nuances, tricks, and loop holes in these pension situations.

Ask…

Q1 - Under what circumstances is a survivor pension lump sum benefit non-taxable?

Q2 - What conditions must apply for the lump sum benefit to be non-taxable?

Q3 - What are the related restrictions?

Q4 - Can the survivor lump sum be rolled into a RIF for a survivor who is 71 years of age? In that case is the rollover non-taxable, with tax paid on income disbursements from the RIF?

Q5 - Is there any way to structure this particular lump sum survivor benefit to reduce taxes? If so, how?

@Nezzer

Continuing from the above, you have to adopt a “Poirot-like” attitude. I know that when I take on the “Miss Marple” persona I find all kinds of interesting and often very helpful rules, tips, and tricks.

Here are just a couple of links to get you started…

Q6 - Can the lump sum benefit be “rolled over” or “directly transferred” into a RIF?

SASK reference from Canadian Credit Union Association

Tax treatments of RPPs versus RRSPs - A tax tale of two benefits at death

Death of a RRIF Annuitant or a PRPP member

https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/rc4178/death-a-rrif-annuitant.html

Exiting a defined-benefit pension plan: Can you and should you?

LOL, Dominique! That is way too much work. If my client was hiring me to do an in-depth analysis, and willing to pay $1,000 or more for an official report of my findings and recommendations, then I agree. But, he is not paying me to do this, and I’m not giving him any “official” advice. I wasn’t sure what the normal procedures and options were for this type of thing - you and everyone else here have been extremely helpful in that respect, so thank you!

Sorry, I don’t understand your references - who are “Poirot” and “Miss Marple”?

Hercule Poirot and Jane Marple are famous Agatha Christie characters. Each has their own particular knack for solving difficult crimes.