Sources of Income During Retirement

Once you have determined your retirement objectives you need to consider the sources of income to support those objectives. You will probably be receiving benefits from the government as well as from your personal savings and pensions. The sources of income are:

Government Benefits:

Old Age Security (OAS)

OAS is not a pension in the traditional sense but rather a social benefits program operated by the Federal government. It is directed at Canadians that have reached the age of 65. Eligibility for OAS depends on how long you have lived in Canada. Generally speaking, if you have lived in Canada for 40 years you will receive the maximum OAS benefit. If you have lived in Canada for between 10 and 40 years you will be eligible for a partial pension.

The maximum OAS pension is considered taxable income. This amount is increased quarterly to account for inflation. The benefit amount you receive is determined by how much income you receive from other sources. If you receive other income the OAS benefit will be reduced.You should apply for your OAS benefits six months before you turn 65. 

Here is a link to the form you need to fill out:

OAS Application

When you apply you will need the following:

      • Proof of age – This does not need to be submitted with the application but you must be able to produce this if requested

      • Proof of Residency – If you have lived in Canada all your life there is no documentation required. However, if you were born elsewhere you will           need to provide proof of residency status (a passport will suffice) and proof of residence history (passports, visa)

Guaranteed Income Supplement (GIS)

An addition to the OAS program is the Guaranteed Income Supplement or GIS. As with OAS, this program is income tested and is directed at low income recipients. To be eligible for GIS an applicant must be eligible to receive OAS benefits and not exceed specified income maximums. Income will include items such as private and government pensions, RRSP payments, employment income and investment income but will not include OAS benefits. The amount of the benefit will depend on factors such as marital status, individual or combined family income and whether a spouse is a recipient of OAS benefits. 

Canada Pension Plan (CPP) and Quebec Pension Plan (QPP)

The CPP and QPP are plans based on work experience in Canada. If you have made at least one contribution to the programs you will be eligible for a pension. The maximum CPP pension is based on someone retiring at age 65. The pension amount is adjusted each year to keep pace with inflation.

The standard CPP benefit is designed to start at age 65 but if you meet certain conditions you can choose to start receiving benefits as early as age 60. In that case your pension will be reduced. The pension is reduced  for each month that you choose to take the pension before reaching 65. There are definite benefits to taking your CPP early so speak to me about whether this is an appropriate strategy for your personal circumstances. You can also choose to delay receiving your pension to as late as age 70 and you will receive significantly more income.

If you and your spouse are both eligible to receive a CPP pension you can split your pensions. Pension sharing makes good tax sense since you and your spouse could end up reducing the taxes you pay.

You must be at least 59 years old to apply for CPP benefits. You can obtain a paper application from Service Canada or make your application on-line. You will be able to submit the application on-line and then mail in a signature page.

Canada Pension Plan Retirement Application

You will need the following when you apply:

      • A Social Insurance Number (SIN)

      • Your spouse’s SIN if applying for pension sharing

      • Bank information if requesting direct deposit

If you are relying strictly on Government sources of revenue you will be receiving taxable income in retirement (OAS and CPP). This may not be enough and hopefully you will have other sources of income.

Registered Assets

Like many Canadians, you probably have investments within an RRSP or RRSPs that you have built up over the years and now as retirement approaches, you may want to start spending that money. You may access your RRSP savings at any time but under current tax law, you may keep the RRSP money tax sheltered until the end of the year that you turn 71. Once you withdraw any funds from the plan they will be fully taxed.

Accessing Registered Funds

With personal RRSPs you have three choices:

1. Withdraw the funds. When you made your RRSP contributions you received a tax deduction and any income earned in the RRSP was tax sheltered. Therefore the monies in the RRSP have never been taxed which means that any withdrawals are fully taxed as income in the year they are received. Given this fact, it is usually not recommended to start receiving the funds until you need them.

2. Purchase a Registered Annuity. By purchasing an annuity with your registered funds you will receive a steady stream of payments over time on which you will have to pay tax. The amount you receive from your annuity is based on interest rates.

3. Transfer the funds into a Registered Retirement Income Fund (RRIF). RRSPs are designed to build up funds while RRIFs are designed to pay funds out. RRIFs look just like RRSPs from an investment perspective with the same flexibility of investment choices. When you establish a RRIF you will be required under tax law to withdraw a minimum amount each year. This amount will be included in your income for tax purposes. There are no maximum withdrawal limitations on a RRIF so you can take out as much as you need provided you are prepared to pay the resulting tax. The younger you are when you establish the RRIF, the lower the minimum withdrawals will be. For more details about RRIF minimums and other features you should speak to me.

Non-Registered Assets

The main difference between registered (RRSPs and RRIFs for example) and non-registered funds is taxation. All income received from a registered plan is fully taxed as income at your marginal tax rate. The taxation of non-registered investments depends on the type of income earned. Capital gains, dividends and interest are all taxed differently and will have implications for your income and investment decisions.

Which Investments should I use first?

You and your spouse may both have registered and non-registered investments to fund your retirement. It does make a difference what money is used first and you should consult with me to determine which is the most tax efficient approach for your circumstances.

 
Other income options:

Leveraging a Universal Life Insurance Policy

Using a Universal Life Insurance policy can also be a tax effective way of receiving funds in retirement while still being able to leave an inheritance on your death. This approach needs to be carefully structured and you should contact me to determine if this is right for you.

Tax-Free Savings Account (TFSA)

As of January 1, 2009, the Federal government provided a new tax efficient savings vehicle for Canadians called the Tax Free Savings Account (TFSA). The TFSA allows taxpayers 18 and over to contribute up to funds each year into an investment account where any income earned grows tax free, and funds may be withdrawn with no tax implications. The range of investments available is essentially the same as provided with an RRSP. The major difference between the TFSA and an RRSP is that there is no deduction allowed for TFSA.

I can provide you with more information about the TFSA as well as assist you in establishing an account.

Pension Plans

You may be a member of a company pension plan or plans and at retirement will be eligible to receive pension benefits. Pension plans are governed under either provincial/territorial law or federal law. Pension plans are all different so you should definitely contact your company’s human resources department or the pension administrator to learn the details of your plan.

Locking-In

Pensions are designed to provide an income during your retirement, so under pension laws, pension money is often wholly or partially ‘locked-in’. That means there are usually restrictions with respect to how much you can access at once.

Taxation of Pension Benefits

When contributions are made to a pension plan the contributor (the company and often the plan member) receives a tax deduction. The money then grows tax sheltered inside the plan. In other words, the payments you eventually receive have never been taxed. Therefore, any pension benefits received are fully taxed as income in the year received.

Different Types of Pension Plans:

There are two basic types of pension plans:

1. Defined Contribution Plans (also known as Money Purchase Plans). These are fairly simple plans and similar to an RRSP. Your employer, and in many cases you, contribute to the plan and your eventual pension amount will depend on how much the contributions have grown to by the time you retire.

2. Defined Benefit Pension Plans. These plans are more complex and at retirement provide a specified amount of pension is determined by a formula.

Receiving Benefits

If you have a Defined Benefit Plan your pension payments will start when you retire. If you have a Defined Contribution plan you will receive a lump sum from your pension plan. You have a number of options with respect to what you can do with that lump sum.

• Purchase an Annuity. You can use the lump sum to purchase an annuity that is a contract that provides you with a specified payment over a specified time period. For example, an annuity may provide you with $25,000 per year to age 90. There are a number of different types of annuities you can buy.

• Transfer the lump sum to a locked-in retirement account. If you are not ready to start drawing money from your pension you can transfer (with no tax implications) the accumulated value to a Locked-In Retirement Account or LIRA. A LIRA is a Registered Retirement Savings Plan (RRSP) that is locked-in under pension legislation. The money in a LIRA can be invested in anything that suits you, giving a great deal of flexibility. I can assist you in making the appropriate choices. When you are ready to start receiving the pension you can buy a life annuity, as described above, or transfer the funds into a Life Income Fund (LIF) or a Locked-in Retirement Income Fund (LRIF). With LIFs and LRIFs the money can be invested in any RRSP eligible investment that suits your circumstances providing flexibility. Under tax law you will be required to withdraw a certain amount of the value of the LIF or LRIF each year and will be fully taxed on it. However, you are also limited with respect to the maximum you can withdraw.

I can assist you in deciding what plan is appropriate for you and how your money can be invested.

Barbara Reid's Wealth Management Team in Hamilton, Ontario