1997-003-e.html

PURPOSE

PROCEDURES

INQUIRIES

A hand-out for employees is being developed which will outline the factors to consider when evaluating a transfer value option versus a deferred annuity. A brief summary of these factors is outlined below.

A "vested" employee who is less than age 50, and who has not opted for a Return of Contributions (ROC), will be eligible to opt for a Transfer Value once the Regulations are in place. "Vested" means the employee could become entitled on termination, to a PSSA benefit, or its value, rather than to a return of contributions plus interest.

a) terminations prior to June 20, 1996

Employees who terminated before June 20, 1996 were "vested" once they had accumulated 5 years of pensionable service. Employees who were less than age 50 on June 20, 1996 and who have not opted for an ROC, will be given a one year time limit (i.e. to April 1, 1998) to opt for a Transfer Value, or to change a Deferred Annuity (DA) option to a Transfer Value option.

b) terminations between June 20, 1996 and the date the Regulations are passed

Employees who terminate on or after June 20, 1996 are vested once they have accumulated 2 years of pensionable service. Employees who are less than age 50 at termination date, and who have not opted for an ROC, will be given a one year time limit from the date of the Regulations to opt for a Transfer Value, or to change a DA option to a Transfer Value option.

The provision to change a DA option to a Transfer Value option is a transitional provision only. Once the Transfer Value Regulations are in place, employees will be subject to the same one year time limit to opt for a Transfer Value as is applicable to other PSSA benefit options.

Employees described in a) and b) who have opted for a DA, or were deemed to have opted for a DA because their one year (normal) option year had expired, will be advised by the Superannuation Directorate of the opportunity to change the option to a Transfer Value. If the employee has not yet made an option, or the termination documents have not yet been sent to the Superannuation Directorate, the employing Department must inform the member of the new Transfer Value option because the Superannuation Directorate will not have received the documentation to process the case.

c) terminations on or after the Regulations are passed

Vested employees who are less than age 50 at termination date will be eligible to opt for a Transfer Value. The Transfer Value option, like any other PSSA option, is irrevocable and must be made within one year of termination of employment. If an employee does not opt for a PSSA benefit within this one year time limit, he/she will be deemed to have opted for a deferred annuity.

PWGSC is not yet in a position to provide an estimate of the amount of Transfer Value that may be payable. For this reason, we suggest that an eligible employee delay making a pension option until the Regulations are in force, and the Systems are in place to provide an estimate so that the option can be made on an informed basis.

If the (vested) member's one year option period expires, the member will be deemed to have opted for a DA, and, as explained in the previous question, will be given an opportunity to change that option to a Transfer Value option.

In most cases, where an employee's one year option period has expired, he/she is deemed to have opted for a Deferred Annuity and cannot change that option to a Return of Contributions. However, the PSSA does contain a remedial provision to change an option if the first option was based on erroneous information.

Because PWGSC is unable at this time to provide employees with details on the amount of the Transfer Value payable, in this situation, once the Transfer Value details are known and if the employee is eligible and still requests a Return of Contributions (ROC), the Superannuation Directorate will review the circumstances surrounding the payment of an ROC with a view to a favorable application of the remedial provisions.

Again, this is a transitional measure only, once the Transfer Value Regulations are in place, eligible employees will be subject to the same one year time limit to opt for an ROC as is applicable to other PSSA benefit options, and any remedial provisions will be strictly applied.

A Transfer Value is paid in lieu of any other PSSA options. If a member chooses a Transfer Value, there are no further benefits payable out of the PSSA. This is exactly the same as when a member chooses a return of pension contributions.

If the member opts for a Transfer Value and later dies, there are no survivor benefits payable under the PSSA. This is an important issue for a member to consider when choosing a Transfer Value. As described in Question 1, the lump sum Transfer Value includes the value of potential survivor benefits, and a minimum benefit in the actuarial calculation.

When the Transfer Value is paid to a locked-in RRSP, it is the responsibility of the financial institution to ensure that the funds are administered in accordance with the Pension Benefits Standards Act (PBSA). The financial institution will be required to certify that the funds are administered in accordance with the PBSA before the funds are released. It is not the responsibility of either the Compensation Specialist or the Superannuation Directorate to advise members on investment decisions or the details of the PBSA lock-in requirements. Employees should be encouraged to explore a number of options with their financial institutions before determining the best choice in their own circumstances. In particular, employees should be encouraged to obtain counseling from the financial institution about the manner in which the lock-in provision will apply.

For your information, however, the PBSA is administered by the Office of the Superintendent of Financial Institutions (OSFI). We are informed by OSFI that the PBSA does not currently impose a minimum age for accessing the funds in the form of a life annuity.

The Income Tax Act places certain restrictions on the amount of a "pension benefit" that can be transferred on a tax sheltered basis to an RRSP. The limit, for employees less than age 50, is based on the following formula:
Annuity payable at age 65 X 9; i.e. (Deferred Annuity less C/QPP reduction) x 9.

The breakdown between the portion of the Transfer Value that is "within" and "outside" the tax limits will be provided automatically by the Pension Support System which provides the Transfer Value estimate; it will not be necessary for the Compensation Specialist to determine these amounts. The Transfer Value will not exceed the tax limits in every case; initial studies indicate that the Transfer Value will tend to exceed the tax limits starting when the member is around age 40 and increasing in the cases of plan members who are closer to age 50.

Where the member's Transfer Value exceeds the tax limit, the portion "within" the tax limit will be deposited directly to the locked-in vehicle. No T4A (or Relevé 2) will be issued and the financial institution will not issue a tax receipt.

The portion of the Transfer Value "outside" the Tax limits will be paid directly to the employee, tax will be deducted at source, and a T4A (and Relevé 2, if applicable) will be issued for this amount. The tax rate imposed on this payment at source is the lump sum tax rate applied to other lump sum payments (i.e. outside Quebec 10, 20 or 30 %; and inside Quebec 16 or 20 % (provincial), and 5, 10, 15 % (federal) depending on the amount of the lump sum). The payment will be included in the employee's taxable income for the year and the member may owe tax at year end.

Following is an example of how the tax limits will impact a Transfer Value payment: (Note that the Transfer Values shown are used for illustration purposes only and are not the true actuarial calculation.)

Example 1:

Member's age 48: Deferred Annuity: $16,152.40
DA less C/QPP $11,266.40
Tax Limit: $11,266.40 x 9 = $101,397.60
Estimated Transfer Value: $107,826.80
$101,397.60 will be transferred to the locked-in vehicle (no T4A will be issued)
$6,429.20 will be paid directly to the member and taxed at source. A T4A (and Relevé 2 if necessary) will be issued.

Example 2:

Member's age 37: Deferred Annuity: $16,152.40
DA less C/QPP $11,266.40
Tax Limit: $11,266.40 x 9 = $101,397.60
Estimated Transfer Value: $76,870.00
$76,870.00 will be transferred to the locked-in RRSP (no T4A will be issued).

Note that this tax limit does not apply to a transfer of a Return of Contributions to an RRSP. An ROC may be transferred directly to an RRSP with no income tax consequences, i.e. a T4A is not issued by PWGSC and a tax receipt is not issued by the RRSP receiving the funds.

The Transfer Value calculation will include only the elective service that is paid up at the transfer value "valuation date". (Valuation date is termination date or option date, whichever is later.) If an employee wishes to maximize the Transfer Value payment, he/she may wish to pay-off any outstanding arrears, or make a (partial) lump sum payment towards the arrears. However, the arrears payment must be made before the valuation date. If the employee wishes to authorize a payment towards his/her election from severance pay, or make a lump sum payment towards the cost of the election, care should be taken to ensure that the payment is made before the employee opts for the Transfer Value.

Compensation Specialists will be provided with a tool (and instructions) to estimate for employees, the amount of service paid up at termination date, and the balance owing on an election. Employees with elective service that is not fully paid at the estimated Valuation date will likely require two transfer value estimates, one including only the paid-up portion of the elective service, and the second including the total elective service. The employee will then be in a position to determine whether it would be to his/her advantage to pay off the elective service before choosing a Transfer Value option.

The Transfer Value is based on the member's full pensionable salary, including salaries above the PSSA "threshold", (for 1997, salaries in excess of $98,700). Where a member's average salary is in excess of the annual salary threshold, the Pension Support System will report both a PSSA value and an RCA value.

In this case, the member can choose to receive a Transfer Value in respect of the RCA benefit, OR, the member can opt for a Deferred Annuity in respect of the RCA benefit. If the member chooses a Transfer Value in respect of the RCA benefit, the amount is payable as a lump sum directly to the member and is taxed at source; this portion of the benefit is not transferable to an RRSP.

If the member chooses a DA in respect of the RCA benefit, the DA is based on service after December 15, 1994 only, and is based on the difference between the member's average pensionable salary and the salary threshold for the year of termination.
Example: Average salary $120,000.
Deferred Annuity (RCA): 2% x ($120,000 - $98,700) x post December 15, 1994 service.

The limits applied to the transfer of a retiring allowance to an RRSP are not related in any way to the tax limits applied to a Transfer Value as described in question 8. The amount of "retiring allowance" that may be transferred to an RRSP depends on the type of pension benefit that the employee is entitled to receive. For purposes of determining the amount of a retiring allowance that is transferable to an RRSP, the Transfer Value is treated the same as any other PSSA pension option. In other words, the "eligible amount" for transfer of a retiring allowance to an RRSP is limited to $2,000 per year of pre-1996 service as described in Q2 of Compensation Directive 1995-054.