Note: This article is part of Morningstar's September 2015 The road to retirement special report.
Most of us have been -- or should have been -- saving for retirement for as long as we can remember. We set money aside regularly through our paycheques, with amounts deducted for an employer pension plan or group registered retirement savings plans (RRSPs), and Canada or Quebec Pension Plan contributions. We voluntarily make periodic contributions to RRSPs and tax-free savings accounts. And those of us of greater financial means also are able to build savings in investment accounts outside those plans.
Hopefully, the result of all this will be a fair chunk of change when you reach your 60s or whenever you decide it's time to retire -- or at least cut back on your workload to allow you to enjoy more free time.
When time comes to begin reaping the benefits of your savings, nothing happens automatically; there's work to be done. Here's what you need to do, and when:
Old Age Security
Everyone aged 65 and over is entitled to receive this federal pension, although the amount of the payments depends on how long you have lived in Canada. If you've been here for 40 years or more, you are entitled to the maximum benefit, currently about $565 a month, and the amount increases each calendar quarter based on the inflation rate. To receive at least the minimum OAS, you must have been a resident for 10 years or more. In some cases, if there is a social security agreement between Canada and your previous country of residence, the number of your qualifying years may be higher.
Even if you are in line for the maximum amount, that doesn't mean you will get it. Even though OAS is not included in your taxable income, some or all of it can be "clawed back" by the federal government if your net income is more than $71,592. The amount of the clawback increases to 100% at $116, 103. Those income amounts are in effect July 2015 through June 2016, and increase each year based on inflation.
The clawback is deducted from each cheque. As an example of the clawback's impact, if your net income was $80,000 in 2014, your annual repayment amount would be about $1,260, or 15% of the difference between the minimum threshold ($71,592) and $80,000. There are some tax-planning techniques that can be used to reduce or eliminate the clawback.
You can defer receiving OAS for up to five years (age 70), in which case you will receive larger payments. Your monthly payments will be increased by 0.6% for every month you delay receiving it, up to a maximum of 36% at age 70. This option makes sense if you continue to work past age 65 and would be subject to the clawback.
What to do: Service Canada will send you a letter a month or so after you turn 64, which will state one of two things:
- That you have been selected for automatic OAS enrolment, in which case you don't have to take any action unless information contained in the letter needs to be updated, or if you wish to delay enrolment until a future year.
- That you may be eligible for OAS and need to complete and mail in an enclosed application form.
Going forward, once you are enrolled in the plan, each January you will be sent an OAS Return of Income form that you must fill out, along with an NR4 information slip that contains information that must be reported on the Return of Income form.
Guaranteed Income Supplement
An offshoot of OAS, the GIS is available to lower-income individuals. You will be entitled to receive it only if your net annual income is no higher than the following amounts:
- If you are single, widowed or divorced: $17,136
- If your spouse receives full OAS: $22,608 (combined income)
- If your spouse receives the allowance for people aged 60-64: $31,680
- If your spouse does not receive OAS: $41,088
The age 60-64 allowance is available to an individual whose spouse receives OAS and is eligible for the GIS, subject to the $31,680 combined-income limit mentioned above.
What to do: You can apply for GIS when you make your OAS application. If you were ineligible for GIS at that time, but later believe you have become eligible, contact Service Canada to obtain a GIS application form.
Canada or Quebec Pension Plan
Unlike OAS, CPP (or QPP for residents of Quebec) is available only to those who have paid into the plan through employer payroll deductions (or, for self-employed people, when they pay their income tax instalments). While most C/QPP members begin taking payments at age 65, you can opt to begin receiving it at any time between ages 60 and 70. If you begin taking it before age 65, you still will have to continue making contributions based on your income. Payments will be less than if you waited to age 65. Similarly, if you delay after 65, when you do begin receiving C/QPP income the amount of the payments will be greater.
The amount you are entitled to receive depends on how much and over how many years you contributed to the plan, and the age at which you begin taking income. Unlike OAS, C/QPP income is taxable, but is not subject to a clawback. As of 2015, the maximum monthly payment is $1,065, or $12,780 annually, for someone who starts taking income at age 65 and who no longer contributes to the plan.
Note that up to 50% of your C/QPP income can be redirected to your spouse, as a form of income splitting, which may result in lower taxes paid overall between the two of you.
What to do: You must apply to receive C/QPP. You can apply for CPP online through your Service Canada account (if you don't have one, set one up at www.servicecanada.gc.ca), or by completing a paper applications form, which can be downloaded from the Service Canada website or obtained from one of its locations. You should apply six months before you wish to begin receiving payments.
For information on how to apply for QPP, go to www.rrq.gouv.qc.ca or visit a Régie des rentes du Québec office. You can apply for QPP online or by using a paper form, and should do so three months before you need to begin receiving income from the plan.
Convert RRSP to RRIF or annuity
You can convert your RRSP to a registered retirement income fund (RRIF) or a registered annuity at any time up until the end of the year in which you turn 71. If you do not do so by that time, your RRSP will be deregistered and the entire proceeds will be taxable that year. You must make a minimum annual withdrawal from a RRIF, and that amount increases each year. For example, the minimum is 5.28% of the RRIF's assets at age 71, 5.4% at 72, 5.53% at 73, and so on until age 94, when the minimum tops out at 20% for that and subsequent years. It's important to note that you can base your minimum RRIF withdrawal amounts on either your age or that of your spouse.
Some retirees opt for the security of a registered annuity, which provides payments that typically are guaranteed for life, or to age 90. These can be indexed to inflation, and a number of other options are available. An annuity is purchased from a life insurance company. Annuities have not been a popular RRSP-conversion option in recent years because their payments generally are based on interest rates available in the year the annuity contract is purchased, and rates currently are at historic lows.
What to do: Contact the institutions that hold your RRSP assets and complete the necessary paperwork to make the transfer to a RRIF or to a registered annuity. In the latter case, you also will need to contact a life insurance company, as annuities are life-insurance products and as such are not sold by banks, investment dealers and other institutions that are not licensed to sell life insurance products.
Employer pensions
If you are a member of a company (or other organization's) pension plan, you will likely begin receiving income from it at age 65, if you haven't already begun doing so. This assumes you are a vested member of the plan, which means you paid into the plan for a specified period of time and thus are entitled to draw a pension based on your years of service. A defined-benefit plan makes payments at a pre-determined amount, depending on the years of service and average income during the final years of employment. A defined-contribution plan (also known as a money-purchase plan) provides income based on the amount of money in the employee's pension account.
What to do: Your employer's (or past employer if that pension was vested) pension administrator can guide you through the process of beginning to take income from your pension. Contact the employer's human resources department to find out who to contact.
Locked-in RRSPs, LIRAs, LIFs and LRIFs
In some cases, a pension benefit from a past employer may have been transferred to a locked-in RRSP or locked-in retirement account (LIRA), which is a restricted-access investment portfolio over which you have investment control, as opposed to pension-plan administrators. As is the case with an RRSP, this money must be transferred to a retirement income vehicle by the end of the year in which you turn 71. In this case, your choices are a registered life annuity, a life income fund (LIF) or life retirement income fund (LRIF), depending on your province of residence. Normally you can effect this transfer as early as age 55. LIFs and LRIFs work in similar fashion to a RRIF, except they also may be subject to maximum withdrawal limits as well as minimums. In the case of a LIF, except at age 80 -- again, depending on the province -- LIF assets may have to be used to purchase a life annuity.
What to do: Check with the institution that holds your LIRA to learn what your options are. General information can be found on financial institutions' websites, such as Royal Bank of Canada and Sun Life Financial.
Governments also have useful information available online, including the Financial Services Commission of Ontario and British Columbia Financial Institutions Commission.
