With the RRSP contribution deadline right around the corner for 2020 income taxes, advisors are seeing a surprising trend in a year upended by a global pandemic.
Despite Covid-19’s impact, many clients who were fortunate enough to maintain regular employment have been making the same RRSP contributions as they have in the past, and some are even putting more into the retirement fund.
But that doesn’t mean financial advisors weren’t being proactive when the coronavirus first hit.
“In the beginning of the pandemic, we reached out to the clients who were making systematic monthly RRSP contributions,” said Leanne Kohtala, senior financial advisor for Manulife Securities in Timmins, Ont.
“We offered to suspend their payments to September, in order to ease any cash-flow concerns they may have been having. We only had a handful take us up on the offer. Those who did suspend payments resumed in the fall, as their employment income was not impacted as greatly as what they had originally feared.”
The severity of Covid-19’s impact on employment varies depending on profession, with service industry workers most negatively affected and those deemed “essential” or able to work remotely coming out mostly unscathed.
Kohtala’s client base is for the most part in the latter category, so the overall job losses and cutbacks during lockdowns were minimal. As a result, savings levels haven’t declined.
“In fact, due to employment not being impacted locally, and significantly changed spending habits, many of our clients have had more free cash flow to save, invest or pay down debt than in prior years,” she said.
Ginny Arnott-Wood, wealth advisor and associate portfolio manager for Raymond James in Burlington, Ont., echoed this sentiment. Many of her clients have been making similar RRSP contributions as in past years, and even adding a bit extra since they’re unable to travel.
“Most of my working clients are able to do so from home, and their expenses are sometimes less than in normal years,” said Arnott-Wood, citing lower commuting costs as an example. “So they have maintained their contributions, or raised them a bit.”
Advice for those impacted
Though every client’s situation is unique, Arnott-Wood said anyone laid off either temporarily or permanently should consider skipping their RRSP contribution this year.
“Making an RRSP contribution this year might not make sense if their income is quite a bit lower,” she said. “If they have surplus, then paying down debt is always a good thing, or contributing to a tax-free savings account [TFSA] might be more beneficial this year.”
Prem Malik, financial advisor for Queensbury Securities in Toronto, would also advise clients to first consider their family’s daily needs.
“Clients who have been impacted financially by Covid and are tight with funds, my advice usually is to make sure the family budget for essentials is looked after before looking at savings,” said Malik. “It makes no sense adding to RRSPs when the family is going hungry.”
Malik said household bills take precedence because you never lose the ability or room to pay into an RRSP, so it’s OK to postpone a contribution when it doesn’t make financial sense.
Kohtala said her advice for clients with lower 2020 incomes would be to consider saving their RRSP contribution for the next tax year.
“Perhaps the RRSP receipt should be saved for deduction in 2021 when their income returns to pre-pandemic levels,” said Kohtala. “A cost/benefit discussion would be had to determine if waiting for the potentially higher tax savings is best given their household circumstances.”
As for those whose employment situation has changed significantly, and potentially for the long-term, Kohtala said it might be worth redirecting their normal savings to a TFSA or put it toward debt reduction.
Managing FOMO
As a side effect of the coronavirus pandemic, Kohtala said she has seen a bit of investing FOMO (fear of missing out) among clients.
“With many individuals unsure of their cash-flow situation this time last year, they were hesitant to invest larger sums, even though they realized there were significant equity bargains to be had,” she said. “Now, as cash-flow concerns have eased, they see the strong market performance and do not want to miss out on future gains.”
Whether a client has been financially impacted or not due to Covid-19, advisors are aware they’ll have questions during these unprecedented times.
“This is an important time for advisors to help guide clients,” said Malik. “These are times when we earn our keep.”
“We have found this year to be the absolute easiest year in memory to book client reviews and have RRSP discussions,” added Kohtala. “With everyone currently ‘grounded,’ it appears that a Zoom annual review with their financial advisor is the social highlight of the week.”