Life’s brighter under the sun

RPPAnnuity Sun Life

PAYOUT ANNUITY

registered pension plan to a TRANSFERS FROM A

A D V I S O RGU ID EWHAT ’S INSIDE

Overview

Transferringfromaregisteredpensionplantoalifeannuityatretirement

DBtransferstoaSunLifepayoutannuity

PensiontransfersatSunLife–steps

Specialretirementplantypes–SERPs,RCAs,andIPPs

A guide to understanding transfers from a registered pension plan to a life annuity

Thepurposeofthisguideistohelpadvisorsunderstandthetransferofregisteredpension

planassetstoalifeannuityingeneraland,specifically,toaSunLifePayoutAnnuity.Itwill

coverthebasicdifferencesbetweendefinedcontribution(DC)anddefinedbenefit(DB)plans

withafocusonhowthosedifferencesimpactthetransferopportunityasoutlinedbelow.

DC plantransfers:

Transferstolifeannuitiesareverycommon.

Generally,therearefewtaxissues.

Determiningclientsuitabilityisarelativelystraightforwardprocess.

DB plantransfers:

Transferstolifeannuitiesarelesscommonbecausetherearefewsituationswherea

transfertoapayoutannuityisasuitablechoice.

Therearepotentialtaximplicationstoconsider.

Determiningclientsuitabilityrequiresmorediligence.

MaynotbepossibleiftheannuitycannotmatchtheDBplanincome.

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3

REGISTERED PENSION PLANS (RPP) OVERVIEW . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

Comparingdefinedcontributionanddefinedbenefitpensionplans. . . . . . . . . . . . . . . . . . . . . . . . . . . 5

HowtotellifapensionplanisDBorDC. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

Whenaclientcantransferandtheiroptions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

TRANSFERRING FROM AN RPP TO A LIFE ANNUITY AT RETIREMENT . . . . . . . . . . . 8

GeneralrulesapplicabletoDCandDBtransfers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8

DetailsapplicabletoDCandDBtransfers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8

Detailstoconsider–DCplantransfertolifeannuity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

Detailstoconsider–DBPlantransfertoalifeannuity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

Maximumtransferableamount. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

The“notmateriallydifferent”ruleandpotentialtaxconsequences. . . . . . . . . . . . . . . . . . . . . 10

Complyingwiththe“notmateriallydifferent”rule. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

SuitabilityofanannuityasatransferoptionforDBplans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

DB TRANSFERS TO A SUN LIFE PAYOUT ANNUITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

Matchingincome . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

AcceptableDBtransfersandthe“notmateriallydifferent”requirement–samplescenarios. . . . .13

PENSION TRANSFERS (DB & DC) AT SUN LIFE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

Steps. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15

SPECIAL RETIREMENT PLAN TYPES – SERPS, RCAS, AND IPPS . . . . . . . . . . . . . . . 16SERPs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

RCAs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17

UnfundedSERPs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

IPPs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

TABLE OF CONTENTS

4

REGISTERED PENSION PLANS (RPP) OVERVIEW

Manyemployersofferpensionplansfortheiremployees.Theplansrangefrombasicplanstomorecomplexplansthatmayofferguaranteedperiodsandotherextrabenefits.

Pensionplansaregovernedbyfederalandprovinciallegislation,witheachlevelofgovernmentresponsiblefordifferentaspectsofapensionplan.Theprovincesorfederalgovernmentregulatetheadministrationofpensionplans.Administrationcoversthingslikerecordkeepinganddisclosure,requiredcontributions,benefits,andgovernmentoversightofpensionplanstoensurethattheyremainadequatelyfunded.

Jurisdiction Applicable Legislation Administered/governed by

Federal PensionBenefitsStandardsAct(PBSA) OfficeoftheSuperintendentofFinancialInstitutions

Alberta EmploymentPensionPlansAct,SA2012

AlbertaTreasuryBoardandFinance

BritishColumbia PensionBenefitsStandardsAct,RSBC1996

BritishColumbiaFinancialInstitutionsCommission

Manitoba PensionBenefitsAct OfficeoftheSuperintendent–PensionCommission

NewBrunswick PensionBenefitsAct PensionDivisionoftheFinancialandConsumerServicesCommission

Newfoundland&Labrador

PensionBenefitsAct,1997 PensionBenefitsStandardsDivision,ServiceNL

NovaScotia PensionBenefitsAct,1989 FinanceandTreasuryBoard,PensionRegulationDivision

Ontario PensionBenefitsAct(PBA) FinancialServicesCommissionofOntario

PrinceEdwardIsland Nolegislation Notapplicable

Quebec SupplementalPensionPlansAct RégiedesrentesduQuébec

Saskatchewan PensionBenefitsAct,1992 SaskatchewanFinancialandConsumerAffairsAuthority

Which federal or provincial pension legislation governs a client’s plan? Aplanisgovernedbythepensionlegislationwheretheplanisregistered.Thisisusuallywheretheheadofficeoftheclient’scompanyislocated.Individualbenefitsaregovernedbythelawoftheprovinceinwhichtheclientworks,exceptwhenthey’reamemberofafederallyregulatedplan.

Atthefederallevel,theIncomeTaxAct(ITA)governsthetaxationofpensionplans,includingthetaxationofpensionbenefitstoplanmembers,andthetaxtreatmentofpensiontransfers.Thereisalsosomefederalregulationofpensionadministrationforpensionsofferedbyemployerswhoareinfederallyregulatedindustries,suchasbanking,telecommunications,railwaysandairlines,andforpensionsofferedbyemployerswiththeirheadofficeslocatedinanyofthethreeterritories.

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COMPARING DEFINED CONTRIBUTION AND DEFINED BENEFIT PENSION PLANSRPPscomeintwobasictypes:DCandDB.TheITAusestheterm“moneypurchaseplan”todescribeaDCplan,buttheindustryusestheterm“DCplan,”sointhisguidewe’llusetheterm“DCplan.”IntheprivatesectorDBplansarebecominglesscommonasemployersoptinsteadtoofferDCplanstoreducetheirongoingpensionliabilities.InthepublicsectorDBplansarestillcommonplace.

ThetablebelowsummarizesthekeydifferencesbetweenDCandDBplans.

DEFINED CONTRIBUTION DEFINED BENEFIT

Contributions definedbytheplan Benefits definedbytheplan

Employermustmakecontributionstoplan•Employermayclaimthecontributionsasatax

deduction•Sizeofemployercontributionsdetermined

byapplicablelawandbyplandocument:percentageofemployee’ssalaryorfixedamount

•Contributionsmadetoapensiontrust

-Areseparatefromemployer’sassets -Notavailabletoemployer’soremployee’s

creditors -Can’tbereturnedtoemployerifvested

Employeemay contributeifplanallows•Employeecontributionslimitedbyregistered

retirementsavingsplan(RRSP)contributionroom Employermatchesemployeecontributionsifplanrequiresit•Sizeofemployermatchingcontributions,if

any,determinedbyapplicablelawandbyplandocument

Employeenottaxedonemployercontributions,maydeductowncontributions(subjecttoRRSPdeductibilityrules)

NewemployeesandemployeeswithoutRRSPcontributionroom(suchasimmigrantstoCanada)mayneedtowaituntilfollowingyearbeforebecomingmembersinaDCplan

Employermust makecontributionstoplan•Employermayclaimthecontributionsasatax

deduction•Sizeofemployercontributionsdetermined

byapplicablelawandbasedonactuarialassessmentofamountneededtofundemployee’santicipatedfuturepensionbenefits,whichinturnisbasedon:

-Employeelifeexpectancy -Normalretirementage -Possibleinterestratechanges -Expectedbenefitamount -Potentialemployeeturnover

•Contributionsmadetoapensiontrust -Areseparatefromemployer’sassets -Notavailabletoemployer’sor

employee’screditors -Generally,can’tbereturnedtoemployer

Employeemaycontributeifplanallows•Employeecontributionslimitedby

-RRSPcontributionrules-Pensionplanrules

Employeenottaxedonemployercontributions;maydeductowncontributions(subjecttoplanandRRSPdeductibilityrules)

During working years (before retirement)

Employee directsinvestmentofplancontributions(subjecttoinvestmentoptionsavailableinplan)

Employerdirectsinvestmentofplancontributions(subjecttoregulatoryoversight)

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continued...

DEFINED CONTRIBUTION DEFINED BENEFIT

Planinvestmentgrowth,ifany,tax-free Employeemustmonitorplantoensureitprovidesenoughmoneyatretirementtoprovideadequateincome.Employeemay•Changeinvestments•Makeorincreasecontributions,subjecttoplan

andlegislativelimits Ifemployeeleavesemployer,andifemployeeisvested*intheplan,employeecan•LeaveplanassetswithemployerplanOR•Moveplanassetstoalocked-inretirement

account(LIRA)

Planinvestmentgrowth,ifany,tax-free Regulatormayrequireemployertoincrease

contributionsifactuarialreportindicatesashortfall,ormayallowemployertoreducecontributionsifpensionsurplusaccumulates

Ifemployeeleavesemployer,andifemployeeisvested*inplan,commutedvalueofplanassetsmovedtoemployee’snewemployerpensionplan(ifacceptable**)ortoaLIRA(subjecttotheMaximumTransferableAmount)

*Vestingmeansemployercontributionsbelongtotheemployee(employeeownsgrowthfromemployerandemployeecontributions).Ifemployeeleavesbeforeemployercontributionshavevested,employeecanmoveonlytheirowncontributionsandthegrowth.**Thisisveryrareasthepensionplansarenotusuallycompatible.

At retirement

Employee responsibleforretirementincome Employerresponsibleforretirementincome

Amountofmoneyavailableforretirementincomedependsonamountcontributedandonemployee’sinvestmentdecisions•Notguaranteedbyemployer

Retirementincomedependsonemployeedecisiontotakeretirementincomeasalifeannuityorlifeincomefund(LIF)•LIFincomenotguaranteedbyemployer•SustainabilityofLIFincomecontinues

todependontheperformanceoftheinvestmentschosenbytheemployeeandrateofwithdrawals

Retirementincomedeterminedbyplanformulabasedonemployeeearnings,yearsofservice•Guaranteedbyemployer•Incomeistakenintheformofalifeannuity

DID YOU KNOW

A DB plan’s “magic number”determineswhentheemployeecanretirewithafullpension.Itistypically85or90(retirementage=age+numberofyearsofservice).Forexample:Iftheplan’smagicnumberis90,age55+35yearsofservice=90.Ifyouhad35yearsofservicebythetimeyoureachedage55youcouldretirewithafullpension.

Theamountofbenefitsisdefinedbyaformula,suchasthoseshownbelow,thoughtherecanbevariations:

1. Careeraverage:pensionbenefitsbasedonapercentageoftheemployee’scareeraverageearnings(usually1or2%)timesthenumberofyearsofservice

2.Flatbenefit:providesaspecificamountofpensionforeachyearworked

3.Bestearningsplan:pensionbenefitsbasedonanaverageofthebestyearsofpensionableearnings(e.g.bestthreeoflastfiveyears).Forexample:averageofbestthreeyears’earningsx2%xyearsofservice

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HOW TO TELL IF A PENSION PLAN IS DB OR DC

Thebestwayistoreviewaclient’spensionstatement.DCplanstatementswilldescribetheinvestmentoptionsthattheclientmayselectfortheplan.DBplansdonotprovideclientswithinvestmentoptionsbecausetheemployerguaranteesthepensionbenefit.

WHEN A CLIENT CAN TRANSFER AND THEIR OPTIONS

OpportunitiestotransferassetsoutofanRPParetypicallyrestrictedtospecificevents: Pre-retirement•RPPrestructure•Terminationofemployment(voluntaryorinvoluntary)

Retirement

*Lockedinretirementaccount–meansanykindofinvestmentaccountdesignedspecificallyforpensionmoneywith“locking-in”provisions.TheseincludeLockedinRRSPsoraLIRAprovidedunderprovincialorfederalpensionlegislation.Inthisarticlewe’llusethetermslocked-inretirementaccount(LIRA)andLIFtodescribeRRSPs,andRRIFsgovernedbyprovincialorfederalpensionlegislation.Note:eachprovinceandthefederalgovernmentmayuseadifferenttermtodescribeRRSPsandRRIFsgovernedbytheirpensionlegislation.

**Assumestheemployeeistooyoungorhastoofewyearsofpensionableservicetoretireandstarttheirpensionincome.

***ADBplanmaybeconvertedtoaDCplan.Employeesoveracertainage(suchasage55)andthoseemployeeswhohavebeenintheplanforasubstantialperiodoftime(suchas10years)maybeallowedtocontinueintheDBplan.OtheremployeesmayhavetheirvaluesintheDBplanfrozenandbecomemembersoftheDCplangoingforward,ormayhavetheirDBplanvaluescommutedandtransferredtothenewDCplan.

DC PENSION PLAN STATEMENT DB PENSION PLAN STATEMENT

Generatedannuallyorsemi-annually Displaysacurrentaccountvalue Displaysdetailsoninvestmentsheldintheclient’splan

Providesdetailsofemployeeandemployercontributions

Describesclient’sdifferentinvestmentoptions

Generallyannually,butcanbegeneratedatanytime

Displaysretirementbenefitamount•Forretirementat65orotherdate

Providesdetailsofvaluesusedtocalculatebenefitamount.

Transfer to another workplace pension plan

Transfer to locked-in retirement account*

Transfer to life annuity

Retirement 4 4

Terminationofemployment**

4 4

Planrestructure*** 4

DID YOU KNOW? “LOCKED IN MONEY”

Pensionlegislationtypicallyrestrictsaclient’saccesstotheirpensionassets(“locksin”theassets)untiltheclientreachesretirementage(typicallyage65,althoughsomeprovincesallowlimitedaccessstartingatage55).Generally,pensionassetscanbetransferredtoaLIRAandheldthereuntiltheclientreachesretirementage.

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We’llfirstdiscussthesetransfersingeneraltermsandthenthetransferfromaDCorDBplantoalifeannuityinmoredetail.

GENERAL RULES APPLICABLE TO DC AND DB TRANSFERS

ThepensiontransferrulessupportoneofthepoliciesunderlyingCanada’spensionsystem:toprovidesometaxassistanceformostCanadianstosaveenoughforretirement,regardlessofthetypeofpensionplantheyhaveandwhetherthey’veworkedforoneorseveralemployersthroughouttheircareers.Pensionmoneyaccumulatesinaccountsthatarenotsubjecttotaxandmaybetransferredtodifferenttypesofpensionaccountswithouttriggeringtaxation.

It’simportanttohavethepensionplanadministratorconfirmtheirproceduresfortransfers.It’salsoimportantthatthepensionplanadministratorconfirmtheexpectedtransferamountsastheywillchangefromdaytoday.Notallpensionplansincludetheseamountsintheinformation/documenttheyprovidetotheirmembers.It’simportanttomakesureyou’redealingwiththerightfigures.

DETAILS APPLICABLE TO DC AND DB TRANSFERS

AtransferfromaDCplanisrelativelystraightforwardwithfewthingsaclientmustconsider.AtransferfromaDBplanismoreinvolvedandtherearemanymoreaspectstheclientmustconsider,includingpotentialtaxconsequences.

Inthecaseofeithertransfer,incomefromthelifeannuitywill: befullytaxableintheyearreceived. qualifyforthepensionincometaxcreditandforpensionincomesplitting,providedtheclientisage65or

older,orreceivestheincomeastheresultoftheirspouse’sdeath.

Clientchoicesregardingannuityfeatures(e.g.lengthofguaranteedperiod,singleorjointlife)willaffectthepremiumamountrequiredtopurchasethelifeannuity:thelessexpensivetheoption,thehighertheincome.Notallannuityfeatureswillbeallowedforallpensiontransfers.

DETAILS TO CONSIDER – DC PLAN TRANSFER TO LIFE ANNUITY

Iftheclientisretiring,someorallofthebalanceintheirDCplancanbetransferreddirectlytoalifeannuity.Iftheclientistooyoungunderprovincialorfederalpensionrulestobuyalifeannuityordoesnotwanttopurchaseanannuityatretirement,someoralloftheDCplanbalancecanbetransferredtoaLIRAorsimilarplan.Later,whentheclientreachestheirminimumretirementageorisreadytopurchaseanannuity,theycantransferthebalancetoalifeinsurancecompanytobuyalifeannuity.

TRANSFERRING FROM AN RPP TO A LIFE ANNUITYAT RETIREMENT

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Example: DC to an annuity – commuted value equals annuity premium

The$200,000:

purchasesanannuitythatwillgenerate$990permonthwiththefeaturestheclientselected.

istransferreddirectlytotheinsurancecompany,tax-free,tobuythelifeannuity.

Example: DC to an annuity – commuted value greater than annuity premium

$180,000istransferreddirectlytotheinsurancecompany,tax-free,tobuythelifeannuity.

$20,000istransferred,tax-free,toaLIRA.

DCpensionplanbalance $200,000

Monthlyannuityincome $990

Premiumrequiredtogenerate$990permonth $200,000

DCpensionplanbalance $200,000

Monthlyannuityincome $700

Premiumrequiredtogenerate$700permonth $180,000

DETAILS TO CONSIDER – DB PLAN TRANSFER TO A LIFE ANNUITYEveryDBplanshouldaccumulatemoneyintendedtofundthecompany’sobligationtoprovideretirementbenefitsforthecompany’semployees.Whenanemployeeleavesacompanythey’reentitledtotransferthevalueoftheirfutureretirementbenefits.Thisvalue,calledthecommutedvalue,iscalculatedatthetimethemoneyistransferred.Itrepresentsthepresentvalueofallfuturebenefitsthepensionplanmayberequiredtopaytotheemployeeatandthroughouttheirretirement.

Whenanemployeeretiresoristerminated,theentirecommutedvalueintheirDBplancanbetransferredtoanotherplan,subjecttopensionlegislationandplanrules(seethetransferrulesabove).Iftheemployeeistooyoungtoretire,thecommutedvalue(ormostofit)generallygoestoaLIRA.Iftheemployeeisatretirementage,twoadditionaloptionsbecomeavailable.Theemployeemaytakeapensionfromtheplanortransferthecommutedvaluetoalifeinsurancecompanytobuyalifeannuity.

IftheclientdecidestotransferthecommutedvalueoftheirpensionfromtheirDBplan,theymusttransfertheentireamount.Theymaynotleaveanyportionofthecommutedvalueintheplan.

Maximum transferable amount ADBplan’scommutedvaluemaybetransferredtoaDCplan,LIRAorLIF,ortoalifeinsurancecompanytobuyalifeannuity.Exceptforthelifeannuityoption,thereisalimitontheamountthatcanbetransferredfromaDBplantax-free.Thetax-freeamount,calledthemaximumtransferableamount(MTA)isdeterminedbyaformulasetoutinIncomeTaxRegulation(ITR)8517.Transferstolifeannuitiesaresubjecttoadifferentlimit,discussedbelow.

IftheMTAisgreaterthanthepensionplan’scommutedvalue,theentirecommutedvaluecanbetransferredtax-free;ifit’sless,onlytheMTAmaybetransferredtax-free.Therestisconsideredan“excessamount”andistaxabletotheemployee.TheonlywaytoobtainanytaxshelteringfortheexcessamountistodepositittoapersonalorspousalRRSP,providedsufficientRRSPcontributionroomisavailable.

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TheITAallowsthetransfertoalifeannuityonatax-freebasisaslongasthe“rights”underthelifeannuityare“notmateriallydifferent”fromthoseprovidedundertheDBplan.Theterm“rights”impliesbenefitsbeyondincome,suchasguaranteeperiods,jointandsurvivoroptions,indexing,andsoforth,asdiscussedbelow.Noneofthemcanbe“materiallydifferent”fromthoseofferedundertheDBplan.

The “not materially different” rule and potential tax consequences Theterm“notmateriallydifferent”suggeststhatthelifeannuityincomecandifferfromthepensionincome,butnotbymuch:thetwoincomestreamsmustbeapproximatelythesame.HowmuchofadifferencewilltheCanadaRevenueAgency(CRA)tolerate?Unfortunately,theCRAwillnotofferanyguidanceonwhetheraproposedtransferviolatesthe“notmateriallydifferent”standard.Itwillonlyevaluateatransferafterthelifeannuityhasbeenpurchased.IftheCRAdeterminesafterpurchasethatthelifeannuitybenefitsdonotcomply,theclientmusttakethefullamountofthecommutedvalueintoincomeintheyearinwhichthetransferwasmade.Note:alifeannuitypurchasecannotbereversed.

DuetotheCRA’sposition,clientsmustseektaxadvicebeforeinitiatingaDBplantolifeannuitytransfer.

Complying with the “not materially different” rule Thebestwaytoensurecompliancewiththe“notmateriallydifferent”ruleistomakesurethattheclient’slifeannuityincomeexactlymatchestheincometheywouldhavereceivedfromtheDBplan,andthatannuityfeatures,suchasguaranteeperiodsandcontinuingincomeforasurvivingspouse,alsoexactlymatchtheirDBplancounterparts.

However,itmaybeimpossibletoavoidsomedifferences.Forexample,alifeannuitymaybeabletomatchaDBplan’sincomeandfeaturesforalowerpremiumthantheDBplan’scommutedvalue.Ifthedifferenceisnottoolarge,theexcessamountfromthecommutedvaluewillbetaxabletotheclientintheyearofthetransfer,butthetransferofthecommutedvalueitselfwillremaintax-free.Howlargeistoolarge?TheCRAhasprovidednoguidance,sotheclientwillhavetospeakwiththeirtaxadvisor.

Conversely,aDBplan’scommutedvaluemaybelessthanthepremiumneededtobuyalifeannuitythatcanmatchtheDBplan’sincomeandotherfeatures.Inthosecases,theCRAhasindicatedthatitmayregardthelifeannuityincomeandfeaturesasnotmateriallydifferentfromtheDBplanincomeandfeatures.Again,however,theriskofviolatingtheruleincreasesasthedifferencesbetweenthelifeannuityandDBplanincomeandbenefitsgrow.Atsomepoint,theCRAmaydeterminethatthelifeannuityincomeismateriallydifferentfromtheDBplanincome.

IndexingisanotherareawheretheCRAhasnotprovidedcompleteguidance.SomeDBplansofferincomethatriseswithincreasesinthecostofliving.Mostlifeinsurancecompaniesdonotofferthattypeofindexing.Again,taxadviceisessentialbecausetheCRAhasnotcommentedonthissituation.

DID YOU KNOW?

To determine the MTA, youmultiplytheDBplan’sexpectedpensionbenefitbyapensionfactorlistedintheregulation.

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DBplancommutedvalue $738,000

DBpensionpayment $4,000/month

Lifeannuitypayment* $4,000/month

PremiumrequiredtomatchtheDBPlanincome* $720,000

DBplancommutedvalue $738,000

DBpensionpayment $4,000/month

Lifeannuitypayment* $3,600/month

PremiumrequiredtomatchtheDBPlanincome* $738,000

Example: DB plan to a life annuity – commuted value greater than annuity premium

Example: DB plan to a life annuity – commuted value equals premium

$720,000ofthecommutedvalueistransferreddirectly,tax-free,tothelifeinsurancecompanytobuythelifeannuity.

Theannuitantmusttaketheremaining$18,000incashanditwillbetaxableintheyearit’sreceived.

Importantnote:Theclientmustconsultwiththeirtaxadvisor.TheCRAmayregardthelifeannuityincometobemateriallydifferentfromtheDBplanincome.

$738,000istransferreddirectly,tax-free,tothelifeinsurancecompanytobuythelifeannuity.*Assumesotherbenefits(survivorbenefits,guaranteeperiods)arethesameforthelifeannuityandtheDBplan.ThisincreasesthelikelihoodthattheCRAwillagreethatthelifeannuitybenefitsarenotmateriallydifferentfromtheDBplanbenefits.

Suitability of an annuity as a transfer option for DB plans TransfersfromaDBplantoapayoutannuityarenotcommon,inpartbecausethesituationswhereatransfermaybesuitableforaclientarelimited.

May be suitable May not be suitable Not suitable

Validconcernsabouttheplan’sfuture•Plansignificantlyunderfunded

Privatesectorpensionplan

Ancillarybenefitseasilyreplacedornotimportanttoclient

Plan’sfutureprospectsgood•Employerhasgoodcredit

rating•Planclosetofullyfunded

Ancillarybenefitsimportanttoclientandmaybedifficult,expensiveorimpossibletoreplace

Governmentguaranteedpension

Clientsseekingestateplanningoptionswherealifeannuityisapoorchoice•e.g.clientvaluesliquidity

andabilitytoleavemoneytoheirsmorethanlifetimeincome

AnnuitybenefitsaremateriallydifferentfromtheDBbenefits

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BeforeinitiatingaDBplantransfertoapayoutannuityatSunLifetherearetwoadditionalmattersthatshouldbeconsidered:

matchingincome,and

acceptableDBtransfersandthe“notmateriallydifferent”requirement.

MATCHING INCOME

ItispossiblethatSunLifewillnotbeabletomatchtheincomefromaDBplan.

SunLifecalculatesannuityincomebasedoncurrentinterestrates(thatchangedaily)andotherfactorslikelifeexpectancy.DBplanstypicallychangetheircommutedvalueassumptions,includinginterestrateassumptions,lessfrequently.Asaresult,theremaybeperiodsoftimewhentheincomeofferedbytheDBplanwillbehigherthantheincomethatwouldbegeneratedfromanannuitypurchasedwiththecommutedvalueoftheDBplan.

ThefollowingchartshowsahypotheticalexampleofhowaDBplan’scommutedvalueandtheannuitypremiumrequiredtomatchtheDBplan’sincomecouldchangeovertimeinadeclininginterestrateenvironment.ThechartshowsthatinthisenvironmenttheamountofannuitypremiumrequiredtomatchtheDBplanincomeincreases,asdoesthecommutedvalue.Theshadedareasshowwheretherequiredannuitypremiumhasadjustedtothedeclininginterestrateswhilethecommutedvaluehasnot.InthissituationthecommutedvaluewillnotpurchaseanannuitylargeenoughtomatchtheDBplanincome.

DB plan commuted value and annuity premium comparison

AnnuitypremiumrequiredtomatchDBplanincome

CommutedvalueofDBplan

CommutedvalueofDBplantoosmalltopurchaseanannuitythatmatchestheDBplanincome

DB TRANSFERS TO SUN LIFE PAYOUT ANNUITY

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ACCEPTABLE DB TRANSFERS AND THE “NOT MATERIALLY DIFFERENT” REQUIREMENT – SAMPLE SCENARIOS

ItispossibleSunLifewillnotconsideratransfertobeacceptableduetothetaxriskassociatedwiththetransferandthe“notmateriallydifferent”requirement.ThetablebelowprovidesseveralexampleswherethetaxriskhasbeenevaluatedandindicateswhetherornotSunLifewillacceptthetransfer.

Pleasenote–SunLifedoesnotofferConsumerPriceIndex(CPI)indexingand,therefore,cannottypicallyaccepttransfersfromplanswithCPIindexing(usuallypublicsectorplans)duetothe“notmateriallydifferent”requirement.Eveniftheriskislow,aclientmustobtaintaxadvicebeforeinitiatingaDBtransfertoalifeannuity.

Scenario Tax risk category and comments Will Sun Life accept the transfer?

A.ThecommutedvalueoftheDBplanwillpurchasealifeannuitythatwillpayincomeandprovidefeaturesequaltothoseoftheDBplan.

Low SunLifewillacceptthistransferinmostcircumstances.

B.ThecommutedvalueoftheDBplanwillpurchasealifeannuitythatwillpayincomeequal totheRPPincomebutthelifeannuitypremiumwillbeless than the commuted valueofthepension.Thedifferencewillbepaidoutasataxablelumpsumpayment.

Low SunLifewillacceptthistransferinmostcircumstances.

C.ThefullcommutedvalueoftheDBplanwillpurchasealifeannuitythatwillgeneratemore incomethantheDBplan.

High

Thistransfercanbechangedtolowtaxriskbybuyinganannuitywithidenticalincomeandpayingouttheunusedcommutedvalueinataxablelump-sum

SunLifewillnotacceptthistransferunlessitismodifiedtoequatetheannuityincometotheDBplanincomeandpaytheremainingcommutedvalueoutinataxablelumpsum.

D.ThefullcommutedvalueoftheDBplanwillpurchasealifeannuitythatwillpayless incomethantheDBplan.

Low,unlesstheincomeissignificantlylowerthantheDBplanincome.

SunLifewilltypicallyacceptthistransfer.

E.ThefullcommutedvalueofaCPI-indexedDBplanisusedtopurchaseanon-indexed life annuitywiththesame startingincomeastheDBPlan.

Mediumtohigh

TheannuitywillnotmatchtheRPPincomebutwillalwaysbelower.Forthistobeconsideredasuitablesalefortheclient,theremustbegoodreason(lackofconfidenceinthefinancialhealthoftheirDBplan)toexitaplanthatwillpotentiallypaythemmoreincome.

SunLifemayacceptthistransferintheraresituationwhereitisacceptabletotheclient,suitablefortheclient,andtheclienthassoughtindependenttaxadvice.

Scenario Tax risk category and comments Will Sun Life accept the transfer?

F.ThefullcommutedvalueofaCPI-indexedDBplanisusedtopurchaseanon-indexed life annuitywithahigher starting incomethantheDBplan.

High

ExitingaCPI-indexedDBplantobuyanon-indexedlifeannuitywithhigherstartingincomehasahighriskofbeingdeemed“materiallydifferent.”

SunLifewillnotacceptthistransfer.

G.ThefullcommutedvalueofaCPI-indexedDBplanisusedtopurchaseafixed indexed life annuitywiththesame or lower starting incomeastheirRPP.

High

ThereisnoleveloffixedindexingthatwillexactlymatchtheCPIindexing.ThefutureincomecouldbehigherorlowerthantheDBplanincomeandcould,therefore,bedeemed“materiallydifferent.”

SunLifewillnotacceptthistransfer.

Thistableisnotall-inclusive;eachDBplantransfermustbeevaluatedonacase-by-casebasis.

continued...

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STEPS

Confirmtheclienthassoughtindependenttaxadviceorhaschosennottoseekindependenttaxadvice.

Confirmtheplanallowstheclienttotransfertoalifeannuityatthistime.

For DC plans

Submittheapplicationandanyapplicabledocuments.

For DB plans

Discussthesuitabilityoftheannuitypurchasewiththeclient.

ConfirmiftheDBplanoffersbenefitsthelifeannuitydoesnot.

IftheDBplanoffersbenefitsthelifeannuitydoesnot,confirmtheclientiswillingtogivethemup.

ConfirmtheDBplandoesnotofferCPIindexing.

SubmittheDBplandocumentstoPayoutAnnuity(HeadOffice)Administrationforreview.Beforeareviewofthesedocuments,we’reunabletoprovideanillustrationduetothepossibilitythattheillustrationdetailswillbe“materiallydifferent”thantherulesoftheDBplan(legislationstipulatesthatwenotbe“materiallydifferent”).

RequestanillustrationtoconfirmifSunLifecanmatchtheincome.

ConfirmifthepremiumrequiredtomatchtheDBplanincomeisthesame,moreorlessthanthecommutedvalue.

Obtainapprovalfromtheplanadministratorforthetransfer.

Iftheincomefromtheannuityis:

thesameastheincomefromtheDBplan:

•Submittheapplicationandallapplicabledocuments.*

higherthantheincomefromtheDBplan:

•Confirmtheclienthasreceivedtheirowntaxadvice(onlytheportionofthecommutedvaluerequiredtomatchtheincomecanbetransferredtopurchasetheannuity.Theexcessmustbetakenincash).

•Submittheapplicationandallapplicabledocuments.*

lowerthantheincomefromtheDBplan,

•Confirmtheclient:

•iswillingtoacceptlowerincome,

•iswillingtoaccepttheriskCRAmayconsidertheannuitytofailthenotmateriallydifferentstandard,and

•hasreceivedtheirowntaxadvice

•Submittheapplicationandallapplicabledocuments.*

*Thesetransfersarecomplex.PleasecontactthePayoutAdminteampriortoinitiatingthetransfer,sotheycanhelpensureafastandproblem-freetransfer.

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PENSION TRANSFERS (DB & DC) AT SUN LIFE

InadditiontoDCandDBpensionplans,youmayencounterspecialretirementplantypes,suchassupplementalexecutiveretirementplans(SERPs),retirementcompensationarrangements(RCAs),andindividualpensionplans(IPPs).ThesecanpresentchallengesthatdifferfromthemorecommonDCorDBplanswhenitcomestotransferringplanassetstoapayoutannuity.However,planadministratorsoftenconsiderpayoutannuitiesbecausetheywanttotransfertheliabilityforincomepaymentsandongoingadministrationtoalifeinsurancecompany.Thefollowingisgeneralinformationaboutspecialretirementplantypes.

SERPS AND RCA TRUSTS (THESE ARE ALWAYS NON-REGISTERED PLANS)

ASERPisanon-registeredretirementplancreatedbyanemployerforitsexecutivestoprovidebenefitsinexcessofRPPandRRSPlimitsundertheITA.Generally,therearetwotypesofSERPs:fundedandunfunded.

AfundedSERPisapromisetopayaretirementbenefitwithmoneysetasidefortheexecutiveinatrust.FundedSERPsaretaxedundertheRCArulesintheITA.

AnunfundedSERPisanemployer’spromisetopayabenefittoanexecutiveatretirementwithoutsettingasidemoneytoguaranteethatpromise.

ThisdiagramshowstherelationshipbetweenSERPsandRCAtrusts,andsomeofthetaximplications.

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SPECIAL RETIREMENT PLAN TYPES – SERPS, RCAS, AND IPPS

SERP

RCA trust(common,holdsSERPfunds)

Trust owned annuity

Tax implications:RCAtrustistaxedonthetaxableportionoftheincomeonanaccrualbasis(prescribedtaxationisnotavailable).Retireeisfullytaxedontheincometheyreceivefromthetrust.Amountspaidtotheretireegenerateataxrefundtothetrust.

Tax implications:premiumusedtopurchasetheannuityisfullytaxedtotheretireeintheyearofpurchase.Amountspaidtotheretireegenerateataxrefundtothetrustormaygenerateataxdeductionfortheemployer(unfundedSERP)ifdeemedareasonablebusinessexpense.Oncetheannuityisestablished,itmayqualifyforprescribedtaxation.

Tax implications:employeristaxedonthetaxableportionoftheincomeonanaccrualbasis(prescribedtaxationisnotavailable).Retireeisfullytaxedontheincometheyreceivefromtheemployer.Theemployermayreceiveadeductionforwhatispaidtotheretiree(ifdeemedareasonablebusinessexpense).

Retiree owned annuity Retiree owned annuity Employer owned annuity

Unfunded SERP(rare,annuitypurchasedatretirement)

NOTE:thetaximplicationsdiscussedabovearenotacompletediscussionofalltaxconsequencesthatmaybeinvolvedwithRCAtrustsorunfundedSERPs.Advisorsmustensureclientsseekindependenttaxadvice.

DID YOU KNOW?

Ifyou’reconsideringtransferringassetstoapayoutannuityfromoneofthesetypesofplans,pleasecontactthePayoutAnnuityTeamtounderstandtheuniquerequirementsassociatedwiththesecasesandforsupportwithprocessing.

RCA TRUSTS

KeypointsaboutRCAtrusts:

TheemployermaydeductthecontributionsitmakestotheRCAtrust.Theretireedoesn’tpaytaxonemployercontributionsatthetimetheyaremadeorontheannualgrowthofassetsinthetrust.

Anyemployercontributionstothetrustandgrowthontrustassetsaresubjecttoa50%refundabletax.

Atretirement,thetrustbeginspayingincometotheretiree,whomustpaytaxonthetrustincomeintheyearit’sreceived.Anyamountthetrustpaystotheretireequalifiesforarefundtothetrustoftherefundabletaxithaspaid:50centsforeverydollarpaidtotheretiree.

TheRCAtrusteecanusetrustassetstobuyapayoutannuity.Therearetwowaystheownershipoftheannuitycanbestructured,eachwithimportanttaximplicationstoconsiderbeforehand:

RCA trust owned annuity Retiree owned annuity

• Generally,theRCAtrustbuysapayoutannuitytoprovidesecureincometosupportsomeorallofitsobligationstotheretiree.Itdoesnothavetouseallofthetrustassetstobuytheannuity(itmaywishtokeepafloatincash).

• Prescribedtaxationisnotavailableinthisstructure(prescribedannuitiesmustbeheldbyanindividual,notacorporationoratrust).Instead,accrualtaxationwillapply,resultingintaxableamountsthatchangeeachyear.

• Asowner,theRCAtrustmaydirecttheinsurertopaytheannuityincometothetrustortheretiree.However,evenifthetrustdirectsincometotheretiree,theinsurancecompanywillstillissueataxreportingsliptotheRCAtrusttoreportthetaxablepartofeachyear’sannuityincome.Inturn,theRCAtrustwillissueataxreportingsliptotheretireetoreportincomepaidtotheretireeeachyearbythetrust,orfromatrustownedannuitypaidtotheretireeatthetrust’sdiscretion.

• Unliketheretireeownedannuitystructure,this requires ongoing administrative and tax accounting by the trustee.

• Thisstructuremovestheliabilityforcontinuingincomepaymentsandadministration(includingannualtaxreporting)totheinsurer.

• Forretireeownedannuities,prescribedannuitiescanbeused.Aprescribedannuityhaspreferentialtaxtreatmentcomparedtoaccrualtaxation.

• Thefullamountoftheemployer’smoneyusedasthepremiumtopurchasetheannuityistaxabletotheretireeintheyearofpurchase.Thisisanimportantconsiderationwithsignificanttaximplicationsforclientsduetothelarge,immediatetaxliability.However,inrarecasestheemployermaybewillingtocompensatetheretireeforthetaximplicationsinordertotransfertheliabilityandadministrationtotheinsurer.

• BeforeSunLifeprovidesapayoutannuityquote,theemployerorRCAtrusteeandretireemustconfirmwithSunLifethattheyunderstandthetaximplicationsandhowtheyplantodealwiththem.

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UNFUNDED SERPS

Employer owned annuity Retiree owned annuity

• Theemployerbuysapayoutannuitytoprovidesecureincometosupportsomeorallofitsobligationstotheretiree.

• Prescribedtaxationisnotavailableinthisstructure(prescribedannuitiesmustbeheldbyanindividual,notacorporationoratrust).Instead,accrualtaxationwillapply,resultingintaxableamountsthatchangeeachyear.

• Asowner,theemployermaydirecttheinsurertopaytheannuityincometotheemployerortheretiree.However,eveniftheemployerdirectsincometotheretiree,theinsurancecompanywillstillissueataxreportingsliptotheemployertoreportthetaxablepartofeachyear’sannuityincome.Inturn,theemployerwillissueataxreportingsliptotheretireetoreportincomepaidtotheretireeeachyear,orfromanannuityitownsbutforwhichithasdirectedtheinsurancecompanytopayincometotheretiree.

• Unliketheretireeownedannuitystructure,thisrequiresongoingadministrativeandtaxaccountingbytheemployer.

• Thisstructuremovestheliabilityforcontinuingincomepaymentsandadministration(includingannualtaxreporting)totheinsurer.

• Forretireeownedannuities,prescribedannuitiescanbeused.Aprescribedannuityhaspreferentialtaxtreatmentcomparedtoaccrualtaxation.

• Thefullamountoftheemployer’smoneyusedaspremiumtopurchasetheannuityistaxabletotheretireeintheyearofpurchase.Thisisanimportantconsiderationwithsignificanttaximplicationsforclientsduetothelarge,immediatetaxliability.However,inrarecasestheemployermaybewillingtocompensatetheretireeforthetaximplicationsinordertotransfertheliabilityandadministrationtotheinsurer.

• BeforeSunLifeprovidesapayoutannuityquote,theemployerandretireemustconfirmwithSunLifethattheyunderstandthetaximplicationsandhowtheyplantodealwiththem.

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IPPS (THESE ARE ALWAYS REGISTERED PLANS)

AnemployerestablishesanIndividualPensionPlan(IPP)foroneemployeeorasmallnumberofemployeesandthen,singularlyorjointlywiththeemployee(s),makesannualcontributionsthatexceedthelimitsofanRRSP.TheseplanscanbeDBorDC,butareusuallyDBandassociatedwithhighincomeindividuals.Thisisdueinparttothehighcostofsetupandmaintenance(byaspecializedadministrator).IPPsmayalsobecreatedforspousesofbusinessownersiftheytooreceiveincomefromthebusiness.

AnIPPhassomeimportantadvantagesoveranRRSP:

Aretireereceivesapensionamountthatisknowninadvance.

ContributionstoanIPPincreasewithage,unlikeRRSPsthatremainatapredeterminedmaximum.

Intheeventoffinancialdifficulty,IPPassetsareprotectedfromcreditors,providedtheIPPwassetupingoodfaith.

Inordertofullyorpartlysecureitsincomeobligationstotheretiree,theIPPadministratorcanpurchaseapayoutannuitytobeownedbytheIPP.TheIPPadministratorcansecureasmuchoraslittleofitsincomeobligationasitdeemsappropriate.AlthoughtheinsurancecompanywillissuetaxreportingslipstotheIPP,anIPPistaxsheltered,soitwillnotpaytaxonanypartoftheannuityincomeitreceives.However,anymoneytheIPPpaystotheretireewillbefullytaxabletotheretireeintheyearit’spaid.

AnalternativeisfortheIPPtotransferthecommutedvalueoftheretiree’spensionplantoalifeinsurancecompanytobuyapayoutannuitythattheretireewillown.AsoutlinedintheDBsectionofthisguide,atransfermustsatisfythe“notmateriallydifferent”ruletobetransferredonataxfreebasis.Oncethetransferiscomplete,theincomefromtheannuitywillbefullytaxabletotheretiree,justastheIPPincomewouldhavebeen.

AnotheroptionisfortheretireetotransferthecommutedvalueoftheirIPPentitlementtoalocked-inRRSPandbuyapayoutannuityusingRRSPmoney.Thisarrangementwillnotbeasrestrictiveasthedirecttransfernotedabove.However,anyannuitytheretireebuysstillwillbegovernedbyapplicableprovincialpensionrules,anditmaynotbepossibletotransferalloftheIPPmoneytaxfreetotheRRSP.Ifthecommutedvalueexceedsthemaximumtransferableamountprescribedbyregulations,theexcessmustbepaidoutincashandwillbetaxableintheyearofthetransfer.

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Life’s brighter under the sun SunLifeAssuranceCompanyofCanadaisamemberoftheSunLifeFinancialgroupofcompanies.©SunLifeAssuranceCompanyofCanada,2017.810-4343-Digital-08-17

For questions about DB or DC pension transfers to a Sun Life payout annuity or special retirement plan transfers to a Sun Life payout annuity, please contact the Payout Annuity Team at head office .