Tuesday, 15 December 2015

Government Pensions

Last week we talked about the basics of pensions that are provided by your employer so now we are going to focus on the government pensions that are available to you (us Canadians anyways). The most significant is usually the Canada Pension Plan but there is also Old Age Security and the Guaranteed Income Supplement that can help out retirees. 

Canada Pension Plan (CPP)
If you work in Canada you most likely contribute to CPP (one of those pesky deductions off your pay cheque) and will therefore be eligible to receive a CPP payment in retirement. The norm is to start receiving CPP at age 65 but you can also take a decreased pension as early as age 60 or an increased pension if you delay past age 65. In most circumstances it makes sense to start collecting CPP at whatever age you retire; the extra tax you would pay if you are still working (increased income) often cancels out any benefit taking it early. The penalty for taking your CPP early is increasing, so that's something to keep in mind; for 2015 it is (was) 0.58% per month prior to age 65 and for 2016 it will be 0.60%. 

The amount of CPP you will receive is dependent on how much you have contributed and how many years you have worked in Canada. Makes sense right? The longer you've worked and the more you've contributed the higher your CPP will be. Just to give you an idea, the maximum CPP payment for 2015 is $1,065/month and this does increase each year. There are however a couple of  factors the CPP includes that may increase your CPP. The first is the 'General Drop-Out Provision'. What happens here is that some low (or no) earning years can be ignored to help boost your CPP amount. If you were a student, unemployed, etc. you can drop some or maybe all of those years so they wont have an impact. Probably the most common situation that would keep you out of the workforce for an extended period is having children, so CPP has a specific provision to deal with this. The 'Child-Rearing Provision' can be used if you stopped (or worked less) because you were the primary caregiver for your kid(s). The one big difference between the two provisions is that the drop-out happens automatically whereas the child-rearing has to be requested, so if it applies to you make sure you do that. 

Now that just focuses on the retirement pension but CPP also includes disability benefits and a survivor benefit. These will help to cover you if you have a disability that keeps you out of the workforce long-term or if your spouse passes away. For more information on CPP you can check out this site

Old Age Security (OAS)
Next up is OAS which can also play a pretty important role in the income of retirees. Unlike CPP, OAS is available to all legal Canadian residents and is dependent on how many years you have lived in Canada. Right now you can apply to receive OAS starting at age 65 but this is being pushed back to age 67 starting in 2023. This means that if you were born in 1957 or earlier you will be able to start collecting OAS at age 65 and if you were born in 1963 or later you're going to have to wait until age 67. If you're somewhere in the middle you will be able to start sometime between 65 and 67...check here for the details. 

To receive the maximum OAS amount you need to have lived in Canada for at least 40 years (after you turned 18) and have resided in Canada for the 10 years prior to applying. The current maximum OAS benefit is $569.95 and this amount is reviewed quarterly and is indexed to rise with inflation. 

One thing to remember is that if you have a high income in retirement you may have your OAS clawed back (or as the government likes to call it, OAS recovery/repayment). For 2015 the income threshold is $72,809 and this also increases with inflation and the clawback rate is 15%. This means that for every dollar over $72,809 you will have to pay back $0.15 so if you have an income over $118,055 your OAS will be fully clawed back. This is important to keep in mind if you'll have a big pension in retirement, you will want to look at maybe pulling money out your RRSP's prior to age 65 and making use of income splitting. 

Guaranteed Income Supplement (GIS)
The final government pension that is available is the GIS but it is only for those with low income in retirement. The GIS is based on your annual income (if you are single) and on a combined income if you are married. For a single person your income has to be below $17,280 to be eligible. For more information on the income levels and payment amounts you can check the tables at the bottom of this page

Side-note: The Service Canada website has been pretty awful lately, so if you are having trouble opening the links provided above you may have to try back a little later; I promise the links are correct (at least as of the date this was posted). 

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