Unless you’ve been living under a rock, the following statement should be of no surprise; that is, it’s getting more and more difficult for Canadians to save for a comfortable retirement. There are a number of contributing factors. Most obvious is that for the past few decades, the cost of living has far outpaced income growth for the majority of Canadian families. This is especially true in large, urban centres, where housing costs have spiralled upwards year after year.
And it’s not only the cost of living that’s taking a bite out of Canadians retirement dreams. As large corporations face tighter profit margins and increased competition, they are moving away from defined benefit pension plans, once a predictable source of retirement income for thousands of Canadian workers. In fact, the trend away from defined benefit plans in the private sector dates back to the 1990s, and, according to this article from the Globe and Mail, are on the verge of becoming extinct.
This creates a real challenge. Of course, Canadian workers still have the Canada Pension Plan (CPP) and Old Age Security (OAS), but these government-funded pension plans are no longer enough to live on.
In this article, I’ll cover everything you need to know about a little known investment vehicle that could provide a boost to your guaranteed income at retirement: the Saskatchewan Pension Plan (SPP). Now, I know what you’re thinking, “thanks, but I don’t live in Saskatchewan”. Well, lo and behold, the SPP is available to anyone in Canada, providing you’re between 18-71 and have available RRSP contribution room. With that in mind, let’s take a closer look at how the Saskatchewan Pension Plan can be used to provide income at retirement.
Contributing to the Saskatchewan Pension Plan
The SPP shares contribution room with your RRSP. That means you need to have available RRSP contribution room in order to deposit funds to your SPP account. With that in mind, the annual SPP contribution limit is $6000, as of January 2018. Like an RRSP, contributions are tax-deductible, meaning that you will receive an income tax receipt come tax time.
What Are My SPP Options at Retirement?
When you retire, you’ll have the option of either transferring the funds in your SPP to a locked-in retirement plan through a bank or investment company of your choice, or keeping the funds invested with SPP, and choosing a lifetime annuity. Let’s take a closer look at the annuity options.
An SPP annuity is designed to provide you with a guaranteed monthly payment for the rest of your life. How much you’ll receive each month depends on a number of factors, including the type of annuity you choose. For the purposes of this article, I’ll review the basic differences between annuity types, but you can also get more information directly from the SPP website.
3 Types of SPP Annuity
The Saskatchewan Pension Plan offers 3 annuity types. Which one is best for you will come down to a number of factors, including whether or not you have a spouse, and what their income needs would be should you pass away.
Life Only Annuity
This annuity will provide you with the highest monthly payment for the remainder of your life. The catch, however, is that when you die, all payments cease, and no benefits will be passed on to a spouse, or beneficiary. This might be the ideal choice for someone with no beneficiaries, or whose spouse has an ample amount of retirement income from other sources.
Refund Life Annuity
The SPP Refund Life Annuity guarantees that a beneficiary, normally a spouse, will receive a tax-deferred benefit when the plan holder passes away. Funds would be transferred with no taxes paid, to the beneficiary’s own SPP, RRSP, RRIF, or Guaranteed Life Annuity. In addition to a spouse, a beneficiary can include a child or grandchild who is financially dependent. The monthly payment in this option is less than that of the aforementioned Life Only Annuity.
Joint Survivor Annuity
Under the joint survivor option, annuity payments would be transferred to your spouse when you die, and continue for the remainder of their life. Their monthly benefit could be anywhere between 60%-100% of your original benefit, depending on what you choose at the time you set up the annuity. If your spouse were to pass away first, payments would end after your death. They could not be passed on to another beneficiary.
What Happens to My SPP When I Die
If you pass away prior to receiving payments from your SPP, the funds you’ve contributed would be paid to your beneficiary. If you pass away after you’ve begun to receive payments from your SPP annuity, then what happens to the balance would depend on the type of SPP annuity you had selected. I’ve covered those options in the paragraphs above.
When Can I Take Money out of My SPP?
The Saskatchewan Pension Plan is locked-in, meaning that your funds must remain in the plan until you are 55 years old. When you become eligible, you can transfer your money into a Locked In Retirement Account (LIRA), or Locked-In Income Fund (LIF) through your primary financial institution. If you choose not to transfer funds to a LIRA, then you must select an annuity through SPP, from which you’ll receive a predetermined monthly payment.
What Can I Expect for a Rate of Return?
When it comes to rate of return for any market investment, the first thing to remember is that past performance is no guarantee of future returns. Like any stock or mutual fund investment, SPP returns fluctuate, and are never guaranteed. With that in mind, here is the most up to date info on historical returns of the Saskatchewan Pension Plan (as at December 31, 2018). This information was pulled directly from their website:
SPP Balanced Fund
Since Inception: 8.00% (Average return over 33-year history)
10-Year Average: 7.35%
5-Year Average: 5.82%
2018 return: -2.05%
SPP Short Term Fund
10-Year Average: N/A
5-Year Average: .77%
2018 return: 1.48%
SPP Canada Features
- Low fee investing. Management fees (MERs) tend to be below 1%.
- Available to all Canadian adults (18-71)
- Annual contribution limit increased to $6,000 in January 2018
- Shared contribution room with your RRSP
- Assets Under Management (AUM), over $500MM
- Return since inception 8.00% for balanced fund (1986-2018)
- Withdrawals can begin at age 55
- Transfer eligibility to LIRA or LIF at your primary financial institution
- Investment funds are independently managed
Who Should Consider Joining the Saskatchewan Pension Plan?
The way I see it, there are two distinct advantages to the Saskatchewan Pension Plan. For starters, it gives investors the ability to hold what’s essentially an actively managed, balanced mutual fund, with a very low MER. Make no mistake, over time, low fee investing can save you thousands of dollars, so this is a good thing.
In addition to low fees, because the SPP can be converted to an annuity upon retirement, it provides the planholder with a guaranteed monthly payment for the remainder of their life. When combined with other income sources, such as CPP and OAS benefits, this can provide peace of mind for anyone who can’t rely upon a guaranteed pension from their employer. In an environment where it’s getting more and more difficult to carve out a retirement nest egg, Canadians need every advantage they can get.