Your main sources of retirement income
If you’re like most Canadians, your income will be
a mix of pension income and income from investments. These
can be divided into 4 main categories:
1. Government Pension Plans
If you’ve ever contributed, you’re eligible for
government pensions. But you won’t get them automatically.
You have to apply and be approved. It’s your responsibility
to do your homework and make sure you get every government
benefit you’re entitled to.
The two major plans are the Canada Pension Plan (CPP) and
the Quebec Pension Plan (QPP). This pension is designed to
replace about 25% of the earnings on which you paid into the
Plan.
The size of the payment you will receive depends on the number
of years you’ve contributed and how much you contributed
during that time.
When you can start collecting
The normal age to begin receiving payments is 65. You can
also begin as early as age 60 but the government will reduce
your benefit by ½ % per month (6% a year) for each
month prior to your 65th birthday. This reduction is permanent.
If you start your pension at age 60, your monthly payment
will be 30% lower (6% a year for 5 years) than if you wait
to age 65, but by starting it sooner, you are likely to get
the pension for a longer period of time.
On the other hand, if you turn 65 and delay taking payments,
the government will increase your benefit by ½ % per
month for each month you delay your claim. Again, this increase
is permanent.
If you start your pension at age 70, your monthly payment
will be 30% higher than if you took it at age 65. If you apply
after age 70, retroactive benefits are only payable for a
maximum of 12 months.
One good thing to know is that your government pensions are
indexed for inflation – they rise each year to cover
the cost of inflation – plus they are guaranteed for
as long as you live.
In 2003, the maximum CPP/QPP retirement pension is $801.25
per month or $9,615 a year.
Old Age Security
Old Age Security (OAS) is a basic benefit paid to all Canadians
who are 65 and older and meet certain Canadian residency requirements.
But depending on your other income, you may have to give some
or even all of it back.
Maximum monthly benefits in 2003 is $456.08 or 5472.96 per
year. If you’ve been an adult Canadian resident for
40 years or more, you qualify for the maximum.
If your income is $57,879 or higher, your OAS could be subject
to “clawback” of 15% tax on the amount your income
exceeds this amount. Once your earnings are approximately
$94,311, you would receive nothing.
Other government pensions
For those with lower incomes, assistance is available through
Guaranteed Income Supplements, Spouse’s Allowance, Widowed
Spouse’s Allowance, Disability Pension and other topping-off
benefits. You can find more information on these and other
government pension plans, at the government web site:
http://www.hrdc-drhc.gc.ca/isp/common/cpptoc_e.shtml
2. Company Pension Plans
We all know people who worked at the same career or for the
same company for 25 or 30 years. And when they retired, they
received around 70% of their pre-retirement income.
To receive 70% of income is about as good as it gets for
a company pension. And it’s becoming rare. Changing
workplace, increasing mobility, early retirement and more
self-employment are some of the reasons.
Company pension plans are as varied as the companies that
offer them. And having one does not guarantee lifetime financial
security. You should become familiar with your company’s
plan, see what it offers and see how it meshes with the rest
of your retirement income sources.
Some company pensions are integrated with CPP/QPP, which
means the employer-paid pension is reduced when you become
eligible for government pension. Some of the most common types
of company plans are:
Defined Benefit Plan –
This is the most popular of all company pension plans. It
guarantees a specific level of pension income, typically a
percentage of your income at a certain age or after a certain
number of years of employment.
These plans are sometimes criticized because they are guaranteed
and must therefore sacrifice some performance for security.
Another drawback is that they are not portable from one employer
to another. Although a commuted lump sum may be transferred
to a new employer.
Defined Contribution Plans –
Also known as “money purchase plans”, these plans
do not guarantee the level of pension income to be paid. They
simply define the amount of the contribution that is made
by the employee and the employer. Although the employee bears
this risk of uncertainty, they can also enjoy the higher rewards
of good economic times.
One advantage is that you can transfer your plan from one
company to another if the new employer accepts the transfer,
or you can roll your money into a Locked-In Retirement Account
(LIRA) or an RRP if you leave your job. At retirement, you
must use the accumulated value of your plan to purchase either
a life annuity or, in some pension plans, a Life Income Fund
(LIF).
Group RRSPs - These are loose
pension programs sponsored by employers and designed to encourage
employees to save through easy payroll deductions. Employers
usually match the employee contribution. The employee has
responsibility for choosing and managing the investments within
their RRSP and for selecting their retirement income plan
when they retire.
Deferred Profit Sharing Plans - Although
not formal pension plans, these plans are often used by employers
to build retirement funds for their employees. The contributions
of the employer and any investment income earned remain tax
- sheltered until retirement.
At retirement or termination from employment, the employee
can either transfer the employer's portion of the funds to
his or her RRSP or select an eligible retirement income option.
3. Income from Registered Investments
At some point, and certainly by the time you turn 69, you
will convert your RRSPs to a RIF (Registered Retirement Income
Fund) or possibly some type of annuity.
If you have a registered pension plan through an employer,
when you leave you can transfer your pension credits to a
Locked-in Retirement Account (LIRA) or a locked-in RRSP. At
some point, you can convert this money to a Life Income Fund
(LIF) or in some provinces, a Locked-in Retirement Income
Fund (LRIF) or an annuity.
You can learn more about RRIFs and LIRAs in the section:
Important
decisions you must make when you turn 69.
And you can learn more about annuities in another section:
One form
of retirement income you can count on.
4. Income from Non-Registered Investments
There are many ways in which you can receive income from
non-registered investments. Here is a listing of a few.
- Interest on personal savings
- Interest from GICs
- Dividends from or sale of stocks
- Interest from bonds
- Dividends or redemption of mutual funds
- Conversion of home equity
- Income from business assets
- Income from real estate
- Liquidation of personal assets
For more information on non-registered investments, please
see the section on Investment
Planning.
Important information about our financial planning services can be found at the bottom of our
homepage.
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