PERSONAL FINANCES - Rating Your Retirement

Understanding your retirement income options can help you determine when you should retire, weigh the advantages of continuing to work past age 65, and assess the impact of taxes on your retirement income.

Like many Canadians, you may be well versed on RRSPs and RSPs, but how much do you know about the public pension plan to which you likely have contributed for most of your adult life?

CPP/QPP

The Canada Pension Plan (CPP) and the Quebec Pension Plan (QPP) became effective on January 1, 1966 after consultations between the federal and provincial governments. Exercising its constitutional right, Quebec opted out of the Federal program and chose to administer its own public pension system. Both programs have very similar benefit levels and eligibility requirements. While these plans differ in their investment arrangements, both provide full portability of benefit entitlements.

The CPP and QPP currently provide:

• Retirement pensions to contributors
• Survivor benefits to the spouse of a deceased contributor and dependent eligible children
• Lump sum death benefits to the contributor’s estate, and
• Disability benefits.

The CPP/QPP benefits that you receive are taken into your income and are taxable. You may also qualify for the Old Age Security program (OAS) and the Guaranteed Income Supplement (GIS) as well as supplementary plans available at the provincial level. OAS pension benefits are subject to income tax in the same way as registered pension plans and CPP/QPP benefits. GIS, the OAS Allowance and the OAS Survivor Allowance (SA) benefits are not taxable; however, they can affect the personal exemptions of the taxpayer that claims a dependant who receives these benefits.

Retirement Benefits at Age 65

Your entitlement to CPP/QPP retirement benefits commences at age 65; the benefits are payable for life. Your public pension plan replaces approximately 25% of the earnings on which you have paid into the pension plan. In 2002, the maximum payment is $788 per month at the age of 65 assuming that you have made sufficient contributions throughout your working career. If not, the amount of CPP decreases in accordance with the years and amount of your contributions.

Your retirement benefits do not automatically start when you turn 65. Generally you must apply to Human Resources Development Canada or the Quebec Pension Board for these benefits. Once you start receiving your pension, you can continue to work; however, you can no longer contribute to the CPP/QPP on any future earnings.

Freedom 60

A CPP contributor who is between the ages of 60 and 64 and has stopped working or has earnings below a specified level of income (approximately $9,400 in 2002) can elect to receive CPP benefits early. In Quebec, a QPP contributor can elect to receive QPP benefits after age 60 if the contributor has no significant earned income.

However, the cost of electing for early retirement can be high. Each month before 65 will cost you 0.5% in pension benefits. Thus, if you decide to take your CPP/QPP retirement benefits at age 60, the cost is 30% of the amount that would be collectible at 65. Based on the $788 per month maximum, the benefit would drop to $552 per month, a difference of $236 per month for the rest of your life.

The advantage of collecting the pension at age 60 is that you gain an additional 60 months of payments at $552 per month for a total of $33,120. However, you would be sacrificing $236 per month of pension that you would otherwise have been entitled to receive at age 65. Based on a life expectancy of 80, you would have given up $42,480 before considering the time value of money.

Working Past 65

If you are approaching age 65 and decide to continue working, you can defer the commencement of your CPP/QPP pension and continue to make contributions based on your earnings. This can be particularly advantageous for those who can substitute years of high earnings after age 65 for years of low or zero earnings prior to age 65.

The pension benefits are increased by 0.5% for each month the payment of pension benefits are postponed beyond age 65 to age 70. Working from the maximum of $788 at age 65, this means that if you work to age 70 and contribute the maximum each year, the monthly collectible increases to $1,025. Based on a life expectancy of 80, an individual opting for funds at 70 would gain 10 years of increase at $237 per month or $28,440. However, this person has sacrificed 5 years of pension at $788 per month or $47,280.

Death Benefits

Upon the death of the contributor, a lump sum death benefit is payable under the CPP/QPP to the contributor’s estate if contributions were made for a certain period of time. The executor must file for the death benefit, which is a lump sum payment to a maximum of $2,500. Monthly survivor benefits may be payable to the deceased’s spouse as well as dependent children.

Disability Benefits

If a contributor under 65 is disabled, a CPP/QPP monthly disability benefit is paid according to the number of years of contributions.

Old Age Security

In addition to the Canada Pension, taxpayers that have lived in Canada an accumulated total of 40 years past their 18th birthday will be entitled to a full pension approximating $442 per month when they attain 65. The OAS pension is clawed back if your net income is above a set threshold; this threshold is approximately $57,000 for 2002. Generally only about 5% of seniors receive reduced OAS pensions and only 2% lose the entire amount.

Retirement is not necessary to receive OAS. There is no correlation between earned income and OAS as it is based upon the number of years one has lived in Canada after the age of 18. If you have not accumulated the prerequisite 40 years, you may still qualify for a full or partial pension based on your date of birth and certain residency criteria.

Review your Statement of Contributions

When you receive your CPP/QPP pension statement, review the amount of your contributions and the amount that you will be entitled to receive on retirement. For more information about Canada’s public pensions, visit the Human Resources Development Canada Web site at www.hrdc-drhc.gc.ca.

Look at the Big Picture

It is doubtful that the public pension benefits will provide the income you will need to achieve your retirement dreams. What other income do you plan to have available on your retirement? Will you have retirement income from other sources such as RRSPs, RSPs, and income-generating investments and proceeds from the sale of real estate or other investments?

Retirement planning is an important part of your overall personal financial planning. Your accountant can help you assess your future retirement income and fine-tune your long-term strategies to realize your retirement goals. If you think you are too young to start planning your retirement, consider that your retirement could last a very long time. It is never too early to start planning for the golden years.