How can an individual or a couple create a guaranteed tax-free pension income for life?
At the outset one might think that this would be impossible to achieve. We have all heard of pension income and for the most part we know that it is taxable because we are only considering registered investments. However one can also create a pension income stream from non-registered investments, the key is how can one receive this income tax-free and make it last for life guaranteed?
The way to create a guaranteed tax-free pension income for life is to combine two strategies. These two strategies are known as GLWB and the more common tax free savings account [TFSA]. Let me show you how to create this income stream by marrying these two strategies.
I will start by explaining what these strategies are in their individual capacity:
GLWB stands for Guaranteed Lifetime Withdrawal Benefit.
This is a feature that can be added to a segregated funds offered by life insurance companies in Canada.
In simple terms segregated funds are similar to mutual funds but they are only offered by life insurance companies with certain guarantees for additional fees.
One of the most recent guarantees that have been added to segregated funds are income guarantees. Income guarantees can be based on an individual’s life or on the lives of a couple. Based on your age and the age of the spouse the insurance company will guarantee income for life ranging from 4.5 per cent to 6.5 per cent.
A tax-free savings account is an account that allows you, under current legislation, to invest up to $5,000 per person per calendar year effective from 2009.
Any capital gains, dividends or interest income earned in this account will be tax free.
Now that we have figured out how to create a guaranteed income for life using the GLWB strategy how do we make it tax free? We achieve this by simply purchasing the segregated fund with the income guarantee in a tax-free savings account. In the accumulation phase of our lives while we are building assets for retirement the insurance company will add a bonus to your GLWB contract every year that you do not withdraw income.
Once you commence withdrawing income in retirement, in what is commonly known as the withdrawal phase, the bonus will no longer be added to your contract, now you simply receive guaranteed income for life. Because this guaranteed income is coming from a tax free savings account it will be tax-free to you.
Hopefully this comes as a pleasant surprise to some of you that in our taxed world there are still some opportunities to put it all in your back pocket. As always speak to your advisor before taking any action.
Written by Stuart Kirk, CIM. Stuart Kirk is a Retirement Planning Specialist with Hicks Financial Inc.
The opinions expressed are those of the author and may not necessarily reflect those of Hicks Financial Inc (www.ghicks.com). Stuart can be reached at stuart@ghicks.com or 250-954-0247.
