Retirement can be daunting for a lot of reasons. For many, it represents a new chapter of uncertainty, combined with the freedom of possibility. And for some, this transition signifies the end of what might have been a life-long career and uneasiness about the sustainability of their retirement savings.
Older Canadians who are approaching or have reached retirement, should know there are several national and provincial programs in place to provide income and benefits, and many are designed to support lower-income people.
People can view these programs as sources of complementary income to go along with products such as employer pension plans and registered retirement savings plans (RRSPs), which convert to Registered Retired Income Funds when they reach the age of 71.
Federal government programs
There are three main programs offered by the Government of Canada that provide benefits to eligible residents. The purpose of these programs is to supplement the income and retirement savings of older Canadians as they leave the workforce. There are different eligibility requirements and benefits that go along with these programs.
1. Canada Pension Plan (CPP)
CPP pays retirement, death, disability and children’s benefits to those who qualify. It’s a mandatory savings program, which most Canadians pay money into throughout their working lives..
The amount of your CPP payment is determined by the number of years you paid into the program, how much you contributed, your average earnings during your working life and the age when you decide to start collecting your pension.
The standard age to begin collecting CPP is the month after your 65th birthday. This is taxable income. In 2019, the maximum monthly payment you could receive at age 65 was $1,154.58 per month and the average monthly amount was $679.16. You can elect to receive your benefit as early as 60 years old. If you do this, you will pay a penalty of 0.6% for every month or 7.2% each year before you turn 65. This equals a 36% decrease if you choose to take it at 60 years old. You can also elect to delay receiving your benefit until 70 years of age. You will receive a bonus of 0.7% a month or 8.4% a year, totalling a 42% increase, if taken at 70.
There are a few factors to consider when you decide to start collecting CPP:
- What is your current income?
- What is your projected income?
- What is your health situation?
- What is the current portion of RRSPs for the family?
These questions need to be addressed prior to collecting CPP and you will need to apply 6 months before you wish to begin receiving payments. Tax efficiency in retirement is crucial and this conversation should be started well before retirement. Another consideration is that you can split up to 50% of the income received from CPP with your spouse, provided you are both over the age of 60. This may put you both in a better tax position.
2. Old Age Security (OAS) pension
This program is for people aged 65 and older who are (or have been) a Canadian citizen or legal resident. To receive the maximum OAS entitlement, you must have lived in Canada for 40 years or more after turning 18. A partial pension is possible if you have lived in Canada more than 10 years after turning 18. If there is a social security agreement between Canada and another country you've lived in, you may be allowed you to add your period of residence in the other country to your period in Canada. Payments are received monthly and are adjusted quarterly if there are increases in the cost of living.
The government funds this program out of their tax revenues, which means that unlike the CPP, you don’t pay into it directly. The maximum monthly payment amount in 2019 was $613.53.
If you're eligible for OAS, you can choose to defer your payments for up to 60 months. Your monthly pension payment will increase 0.6 percent for every month you delay receiving it – up to a maximum of 36 percent.
You should be aware of OAS “clawback,”. This happens when you've earned more than $77,580 in income. In this situation, you will lose $0.15 of your OAS benefit for every dollar above $77,580 that you earned. If you earn more than $125,937, you will lose all OAS benefits. If you are 65 and make income between or above this range, you may want to delay OAS until you turn 70, so you can maximize your potential OAS benefits.
3. Guaranteed Income Supplement (GIS)
This is a program for low-income Canadians who already receive OAS. The government determines payment amounts based on income and marital status and these benefits are not considered taxable income, like CPP and OAS are.
If you're already receiving GIS and your spouse is between the ages of 60 and 64, he or she can apply for an Allowance, which is a separate benefit.
If you're looking to benefit from these programs, you must apply for them because they don’t kick in automatically when you hit a certain age. You also need to file your income taxes every year. It’s best to talk with an advisor to help determine your eligibility.
Alberta Seniors Benefit
In addition to these federal programs, Albertans may also be eligible for income benefits from the Government of Alberta, through the Alberta Seniors Benefit.
The Alberta Seniors Benefit program is for low-income seniors 65 years of age and older. To be eligible for this program you have to be receiving OAS and you must be a Canadian citizen or permanent resident who's lived in Alberta for at least three months.
The province determines benefit amounts by factoring in considerations like income. Individual seniors with an annual income of $28,150 or less, or couples with a combined income of $45,720 or less, may be eligible.
Investment strategies for government benefits
It's one thing to get money from the government, but it's quite another to know what’s best to do with that money.
One option is to re-invest your income from government plans in a tax-free savings account (TFSA). A TFSA is a tax-sheltered plan where investors can save for both short and long-term goals. Unlike an RRSP, you can't claim a tax deduction for your contributions, but any withdrawals you make are tax-free. The TFSA contribution limit for 2020 is $6,000 and unused contribution room can be carried forward (the current combined total is $69,500).
By being aware of these numbers, it will help ensure that your plan has a solid foundation. As we meet this year, we will review these numbers and work with your accountant as needed to maximize your after-tax income.
Mutual funds, other securities and related financial planning services are offered through Credential Securities. Credential Securities is a division of Credential Qtrade Securities Inc. Credential Securities is a registered mark owned by Aviso Wealth Inc. Financial planning services are only available from advisors who hold a financial planning accreditation through applicable regulatory authorities. The information contained in this article was obtained from sources believed to be reliable; however, we cannot guarantee that it is accurate or complete. This article is provided as a general source of information and should not be considered personal investment advice or a solicitation to buy or sell any mutual funds and other securities.