Pensions-What to Expect

Government Pension Programs – What Can I Expect?

July 2015

There are two main government pension programs in Canada: Canada Pension Plan (CPP) and Old Age Security (OAS). In recent years there have been changes to both programs; in fact some of the changes are still being phased in. I spend the bulk of my day working with retirees and soon to be retirees, government pensions are a frequent topic of conversation. There seems to be quite a bit of confusion surrounding the programs and most folks simply want to know: What can I expect?

CanadaPension Plan

CPP is a contributory program. You contribute 4.95% of your income to CPP (more if you are self-employed). If you have made at least one payment into CPP you qualify to collect a benefit. The more you pay into the program the larger the benefit you can collect. The standard start date for CPP is 65; however you are able to collect as early as 60. If you collect early there is a penalty. The reduction used to be 0.5% for every month prior to your 65th birthday. Since 2012 that number has been increasing, in 2015 the penalty is now 0.58% per month and by 2016 the increase in penalty will be fully phased in and will be 0.6% per month. After 2016 if you collect at 60 there will be a 36% reduction in your pension benefit.

In 2014 the maximum monthly benefit you could collect at 65 was $1,038.33 in 2015 the maximum increased to $1,065 per month. CPP is adjusted every January for cost of living. In order to collect the maximum you most contribute the maximum for the majority of your career, in 2014 if your income was over $52,500 you contributed the max. In 2015 that number has increased to $53,600. Most folks do not receive the maximum, as of January 2015 the average monthly benefit collected at 65 was $618.59. Your CPP benefit is taxable.

CPP is not automatic, you must apply for CPP. You can get an estimate of how much you will receive from CPP by checking your statement of contributions. You can also call 1-800-277-9914. I encourage folks to look at their statement of contributions it provides a good estimate of what you can expect from CPP.

Old Age Security

The second government pension program is OAS. Unlike CPP no one directly pays into OAS, it is funded by the federal government’s general tax revenues. OAS provides a monthly benefit to anyone 65 years of age or older. Every quarter the OAS benefits are adjusted for cost of living. The current maximum is $564.87. Similar to CPP, OAS is taxable. Unlike CPP most folks qualify for the maximum monthly benefit. The amount of your pension is determined by how long you have lived in Canada after the age of 18, at 40 years you qualify for the maximum pension. I tell most retirees to expect the maximum benefit.

In 2012 the government pushed back the start date for OAS. Starting in April 2023 the start date for OAS will gradually increase from 65 to 67. The increase will be fully implemented by January 2029.

Unfortunately OAS has a little wrinkle called recovery tax; it is better known as the claw back. If your income is above a threshold your OAS will be reduced. In 2015 the threshold is $72, 809 and once your income is above $117,954 your OAS will be completely clawed back.

OAS is supposed to be automatic; you should not have to apply. However if there is an issue you can call the number listed above.

The OAS program also includes additional help for low income retirees through the Guaranteed Income Supplement and the Allowance. For additional information on these topics please visit: servicecanada.gc.ca

As you can see you can expect some income from the government pensions in retirement. However the amount you receive is often not enough to fund your retirement. In my view the government pensions form a small piece of your overall retirement plan.

Clinton Orr B.Comm (hons.), CIM, CFP, DMS, FMA  lives in Beausejour and is a portfolio manager with National Bank Financial.

 

This information transmitted is intended to provide general guidance on matters of interest for the personal use of the reader who accepts full responsibility for its use, and is not to be considered a definitive analysis of the law and factual situation of any particular individual or entity.  As such, it should not be used as a substitute for consultation with a professional accounting, tax, legal or other professional advisor. This commentary reflects my opinions alone, and may not reflect the views of National Bank Financial Group.