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If you have the faintest feeling that you may be receiving an early retirement or severance package from your company soon, don’t wait until it actually happens - start planning right away. Usually when the package is offered the deadline for making a decision is quite tight and this can mean you will be under pressure to make one of the most important financial decisions of your life in the span of a few days.
Of course financial planning is an ongoing process and should not be based on reacting to crisis situations and hopefully you have addressed your financial and retirement planning already. However, in case you have not or if your plans have not been updated recently, losing a job is a traumatic experience for most people so it is best that you do your homework well ahead of time so that you do not have to deal with stressful financial decisions at the same time.
Planning Ahead
Obviously not knowing the details of the package you will not be able to evaluate it ahead of time. However, what you can do before receiving a package is the homework needed to figure out your cash needs at retirement.
The first step is to figure out your expenses in retirement. To do this, complete a cash flow projection based on the lifestyle you would like to have in retirement. This is an exercise in dreaming. You need to imagine that you are retired today and estimate what your desired lifestyle would cost in today’s dollars.
The next step is to take stock of your financial resources. Assemble a list of your stocks, bonds and mutual fund holdings, RRSPs, real estate and other assets.
Request a projection of your pension plan benefits and familiarize yourself with the rules and regulations of your pension plan, especially those pertaining to early retirement benefits.
Review your financial and retirement planning with your financial advisor and see where you stand with regards to your retirement goals.

Severance Packages

There are several aspects of a severance package that need to be considered such as:

1. Cash payment
2. Retiring allowance rollovers
3. Pension options
4. Group benefit options
5. Tax implications

Retiring Allowances

As defined by Canada Revenue Agency, a retiring allowance is an amount received on or after retirement of an employee in recognition of long service, or in respect of a loss of office or employment.
While retiring allowance includes pay for unused sick leave or damages (such as those paid for wrongful dismissal), it does not include pension benefits, amounts paid for unused vacation time or payments given in lieu of termination notice.
The tax treatment of retiring allowances used to be much more generous before 1996. However, the 1995 federal budget removed the favourable tax treatment of retiring allowances.
If you had been working for your current employer before 1996, you will still be able to transfer a portion of your retiring allowance to your RRSP without using your RRSP contribution room.
The amount that is eligible for transfer is $2000 for each year or part year you worked for your company before 1996. In addition, you can transfer $1500 for each year or part year you worked for the company up to 1989, provided you did not have vested rights in a registered pension plan or deferred profit-sharing plan.
Pension Options
If you are a member of a registered pension plan (RPP), when you receive a severance or early retirement package you will also receive a pension options election form and be provided with the option of keeping your pension with your previous employer, moving it to a Locked-In RRSP, or moving it to a new employer’s pension plan.
You have to discuss these options with your financial advisor and run different scenarios to evaluate which one would make more sense in your particular circumstances.
The good news is that thanks to recent changes to pension regulations, you no longer need to convert locked-in RRSPs to life annuities at age 80. This means payouts to your spouse can continue on an unreduced basis after your death and the full after-tax value of you locked-in funds can be transferred to your heirs.
An important question you should be asking is if your retirement package eliminates or reduces the early retirement penalties or will your pension be reduced for life?
You also need to compare the pension benefits offered to those you would have received at normal retirement age.
Group Benefit Options

If you were covered under a group benefit plan at work you may be able to convert some of the benefits to personal plans and pay for them personally.
Usually your group life insurance benefits can be converted to a personal life insurance policy without proof of health. This has to be done within 30 to 60 days of leaving your employment. It can be a valuable option if you have serious health issues and are not insurable any more. On the other hand, if you are in good health, you should look at all your options as you may easily find more cost effective insurance than the options offered to you under the guaranteed conversion options of your group life insurance policy.
Your long term disability insurance plan at work is not portable and if you intend to continue working then you should look at obtaining a personal disability insurance plan to insure your income going forward.
The health and dental benefits may be offered to you in the same format as before or on a modified basis as part of your early retirement package. Therefore, you should inquire about these benefits and whether they will continue after you leave the company. If they cease, you are generally covered for 30 days after leaving your employer during which time you can look for personal coverage.

Tax Consequences
As discussed before, you may be eligible to roll over all or part of your retiring allowance into your RRSP on a tax free basis if it qualifies under the tax rules.
It is best to ask your employer to deposit the retiring allowance directly into your RRSP. This way they do not need to withhold tax on the amount. If they pay it to you and you then deposit it into your RRSP, taxes need to be withheld at source and you will get those taxes back only after you file your tax return for the year which means a few months lag time until your tax is processed during which time you will not have access to the withheld taxes.
If you started working for your employer after 1997, your retiring allowance does not qualify for transfer to your RRSP. In this case, you can only contribute up to the maximum contribution room you have available in your RRSP. If you have maximized your RRSP contributions and have no contribution room available, then you will have to report the retiring allowance as income in the year it is received and pay tax on it.
If this applies to you then you may want to negotiate with your employer to see if you can receive the retiring allowance payment over the course of two or more taxation years to reduce the tax impact.
You can find out the amount of the retiring allowance that is eligible for transfer to your RRSP in box 26 of your T4A slip. Ineligible amounts on the other hand, will be shown in box 27.

Pension Adjustment Reversal (PAR)

If you were a member of a defined benefit pension plan and you decide to transfer the vested amount into a locked-in RRSP, you will be eligible for the Pension Adjustment Reversal (PAR). When you contribute to a defined benefit pension plan you lose RRSP room. PAR was created by the federal government to help terminated employees who participated in their company’s defined benefit pension plan recapture this lost RRSP room. As a rule of thumb, your PAR will be equal to the amount by which the combined amount of your company’s and your own contributions to the pension plan exceed the lump sum amount that you received when your employment was terminated and you left the pension plan. Your PAR has to be reported by your pension plan administrator by Dec. 31st of the year of termination from the defined benefit pension plan.
This newly created RRSP room will allow you to contribute some of the cash portion of your severance package that is not eligible as a retiring allowance rollover, to your RRSP in the following year.

Other Considerations

There are other issues you need to consider when making a decision on whether to accept an early retirement package that you have been offered. These include:

• What are the consequences of not accepting the early retirement package? Will you be transferred, face a reduction in pay or face termination?
• What are the odds that you can find another job or work as a consultant?
• Are you psychologically and emotionally ready to retire and do you know what you want to do in retirement?

Whether you are offered a severance or early retirement package you need to carefully evaluate the tax and financial planning implications of your options. A frank discussion with a Certified Financial Planner can help you make informed decisions based on the particulars of your personal circumstances.

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Tina Tehranchian, CFP, CLU, CHFC is a branch manager and financial advisor with Assante Capital Management Ltd (Member-CIPF) in Richmond Hill, Ontario and can be reached at (905) 707-5220 or www.tinatehranchian.com. The opinions expressed are those of the author and not necessarily those of Assante Capital Management Ltd.