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May 3, 2021

Pay Attention To Your Pension

by Rita Silvan
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Looking for a theme song to capture the mood today? May I suggest, “One Day at a Time” from the 1970s sitcom of the same name.1 Listen to it a few times and I guarantee you’ll forget about COVID-19 because you’ll be too busy wrestling with this earworm.

These days, taking it “one day at a time” seems about as good advice as any—except when it comes to retirement planning. The pandemic reminds us how little control we have over the big stuff that throws plans into disarray. For those of us within hugging distance of retirement, this health crisis and the ensuing economic upheaval have meant job uncertainty at an inopportune time. Reduced work hours, a furlough or even a permanent job loss means some may need to work longer to pad nest eggs or help family members. It could also mean retiring sooner than expected.

Early retirement has a big effect on our future retirement income in a number of ways. Let’s take a closer look. Take Penny, for example. She is 60 and single and worked in corporate communications until May 2020 when she was laid off. She has no employer-sponsored pension plan. Now she must decide what to do next: try to replace the lost job, work freelance, or take early retirement? The odds of replacing her full-time corporate job are low due to pandemic-related hiring restrictions, a surfeit of qualified job seekers, and age discrimination. After considering her options, Penny decides to retire early.

Short of winning the lottery, discovering a long-lost relative has left you her fortune, or designing a killer app, retirement income typically has eight limbs. When they work together effectively, they provide a secure and predictable retirement income. Here’s how each would be affected by Penny’s early retirement:

Old Age Security (OAS)

Eligible Canadian seniors aged 65 or older automatically receive a monthly taxable income from the Government of Canada. ($613.53 per month in 2020). If you defer receiving OAS until 70, the maximum deferral period, payments are 36 per cent more per month ($834.40). The payments are indexed to inflation (CPI). Even if inflation decreases, payment amounts do not decrease. Penny will not be able to receive OAS until 65 at which point, she will receive $7,362.00 (2020) If she is considering deferring OAS, the following are the break-even ages at which point she would be ahead by deferring: At 66, it’s 80 and increases each year until 70 for a break-even age of 84. If Penny believes she will live past 84, deferring OAS to 70 is a good idea.2

OAS is means-tested, so payments are clawed back when income reaches $79,054 and they disappear completely at $128,137. Note: If you defer OAS, you cannot receive the non-taxable Guaranteed Income Supplement ($916.38 monthly for singles with an income below $18,600.)

Canadian Pension Plan (CPP)

This is the big enchilada for those who do not have a defined benefit or defined contribution pension plan through an employer. CPP payments are taxable retirement income, indexed to inflation. To be eligible to receive CPP, you must be at least 60 years old and you and your employer(s) must have contributed to it. In 2020, the maximum benefit at 65 is $1,175.83 ($14,110). By deferring the payments until 70, the recipient gains a minimum increase of 42 per cent. (According to Fred Vettese, former chief actuary of Morneau Shepell and a retirement expert and author, the surplus benefit is closer to 50 per cent because of the annual wage inflation increase of approximately one per cent added to the base amount). Another little-known fact: based on complex actuarial calculations, CPP payments embed a guaranteed annual return of 6 per cent.4 When other forms of secure fixed income, such as government bonds, are earning less than half a per cent, six per cent is a giant boon not easily found elsewhere.

Penny wonders when she should begin taking CPP. Unless she requires the cash flow, she should avoid taking early CPP because her benefits would be reduced by 36 per cent. On the other hand, if she waits until age 70 to receive CPP, she will receive 42 per cent more. Ah, but there are caveats:

If Penny is in poor health or believes she may not live past 80, she should take CPP at 65.

Because CPP payouts are based on 39 years of maximum contributions, if Penny has not already reached the maximum, then the no earning years between 60-65 may actually decrease her calculated pension. In this case, waiting until 70 may not be much benefit as the increase in payments would be offset by being calculated on a smaller base amount.5

To get an estimate of her future monthly CPP benefits and an official Statement of Contributions, Penny should call the Canada Pension Plan at 1-800-277-9914 or visit the My Service Canada account. She could also contact pension consultant Doug Runchey, aka Dr. Pension, for a personalized report.6

Registered Retirement Savings Plan (RRSP)

Unless she has contribution room, and needs the tax deduction, Penny will no longer be adding to her RRSP. In fact, this will be one of her sources of retirement income. Canadians have a love/hate relationship with RRSPs. They love the tax deferral but hate paying taxes on withdrawals. When Penny begins to withdraw from her RRSP, her financial institution will withhold up to 30 per cent of the amount to cover taxes owed. (Amounts vary by province.)7

Penny needs to calculate how much after-tax income she needs from her RRSP and the amount of tax this will incur. In Canada, non-refundable tax credits mean that Penny will not pay tax on the first $10,000 or so of earnings (employment, business income, rental income, investments, pensions).8

Alternatively, Penny can convert her RRSP into a RRIF (Registered Retirement Income Fund). If she makes the minimum withdrawal, no tax is withheld at source.9 In any event, she will need to convert her RRSP into a RRIF at age 71.

Tax-Free Savings Account (TFSA)

Funds in this account can be used strategically to top up Penny’s income without tipping her into the next tax bracket or incurring a claw-back to OAS or other means-tested government benefits. Any funds withdrawn can be re-deposited the following tax year, unlike a RRSP or RRIF.

Non-registered Investments

Different tax rates apply to income from interest, dividends and capital gains, in descending order. Penny should remember that dividend income from eligible dividends is grossed up by 38 per cent and could bump her into the next tax bracket.

Advanced Life Deferred Annuity (ALDA)

ALDAs are a new (in Canada) type of annuity product where payments can be deferred until age 85. ALDAs can be purchased with funds from RRSPs, RRIFs, Deferred Profit-Sharing Plans and company pension plans up to $150,000 (indexed to CPI).10

If Penny is concerned about running out of money later in life and does not have real estate to fall back on, she may consider purchasing an ALDA with a portion of her retirement savings. Unfortunately, with interest rates at historically low levels, the prices of ALDAs are quite high. If she decides to buy an annuity product, she may want to stagger purchases every 5 years in case interest rates rise.

Permanent Life Insurance

If Penny has a permanent life insurance policy, it has been growing in value, called “cash value”. The increase in cash value is tax-free. Penny can tap her policy for income (she will be taxed on withdrawals) or use it as collateral against a loan to provide cash flow. At death, the life insurance will repay the outstanding loans and disburse the residue to Penny’s beneficiaries.11

Real Estate

Penny can use her real estate asset(s) to generate retirement income in the following ways, each with its own advantages and disadvantages to be considered:

Sell her real estate and use the proceeds to fund her lifestyle, purchase an annuity, and for investment purposes.

Lease her real estate and use the rental income to cover a lower cost living arrangement and pocket the difference.

Create a rental unit(s) within her home to generate income.

Use a reverse mortgage to continue to live in her home and generate income.

Rita Silvan, CIM is a finance journalist specializing in women and investing. She is the former editor-in-chief of ELLE Canada and Golden Girl Finance. Rita produces content for leading financial institutions and wealth advisors and has appeared on BNN Bloomberg, CBC Newsworld, and other media outlets. She can be reached at