Tomorrow’s retirees may be well advised to seek help in planning for tax-efficiency in retirement, because their taxes on both income and capital could soon rise and this needs to be taken into account in wealth management.
Two recent studies provide insight: one by the OECD in May 2014, (http://www.oecd.org/social/OECD2014-FocusOnTopIncomes.pdf) found that there has been a spectacular rise in top income earners in the US and Canada, some of that resulting from favorable taxation policies.
The study noted that lower personal tax rates over the period of the financial crisis have had two positive effects on those who earn high incomes: first, incentives to evade taxes are diminished when people have more disposable income. Second, more investments are made when people have more spare change, after taxes.
However, this low tax environment could change. The OECD has studied ways to increase taxation on top earners, including reducing tax deductions and credits, taxing all income from employment including fringe benefits as ordinary income and reviewing taxes on inheritances. In Canada today, surtaxes on high incomes and increased taxation on dividends and capital gains are already appearing in provincial budgets.
When it comes to income, the richest of the rich in Canada receive 20% of income from capital, a lower percentage than in other countries. Here more highly educated professionals are in the top earning group. However, this too may change as those earners plan for retirement. Retirees rely increasingly less on their human capital and more on their assets to produce income, a positive outcome of a lifetime of diligent saving and investing.
This is supported statistically today. The segment of Canadian society that has the most wealth today, according to the Survey of Financial Security (2012), happens to be those over 55. Older means richer for a variety of reasons: debt is paid down and personal residences are downsized as children fly out of the nest, producing capital from a tax exempt asset that requires investing. Capital has also been accumulating for longer periods of time, often in deferred taxation accounts.
Tomorrow’s asset-rich retirees and their heirs may well be targeted in future tax increases. The key to wealth sustainability, therefore, must involve new thinking about retirement income planning. It will include more precision about which investment vehicles to save in, and how to achieve the greatest tax efficiency from them upon withdrawal.
Fortunately, since 2009, it’s been possible to accumulate tax-free income inside a TFSA: a powerful tool for future retirees. In addition, recent law has introduced pension income splitting with spouses. For singles, a keen eye on the averaging of taxable income sources throughout retirement is important.
It’s Your Money. Your Life. This may well be one of the lowest taxed decades this century. Taxpayers have the right to arrange their affairs within the framework of the law to pay the least taxes possible. It’s a good time to do that, but getting the after-tax results needed from income and capital in retirement increasingly requires specialized help.
That makes this a great time for specialists in tax efficient retirement income planning to hone up their skills to serve one of the biggest pre-retirement demographics in our history.
We hope you’ll join us to explore the possibilities that tax efficient retirement income projections can bring at the Distinguished Advisor Workshops starting mid September, or take the certificate course from Knowledge Bureau, online.