Copyright © 2008 Pearson Education Canada 6-1 Chapter 6 Retirement Income.

Copyright © 2008 Pearson Education Canada6-1

Chapter 6

Retirement Income

Copyright © 2008 Pearson Education Canada 6-2

Sources of Retirement Income Public pensions Private pensions Investment income


Canada’s Retirement Income System Canada Pension Plan Old Age Security System

OAS GIS SPA

Tax Assistance for Retirement Planning RPP’s DPSP’s RRSPs


Canada Pension Plan Introduced in 1966 Social insurance program

Administered by Federal government Paid for by employees and employers

Earnings related program Based on five-year average earnings Not an income redistribution program

As is the OAS system


Canada Pension Plan Benefits Provides monthly pensions

To contributor in retirement To disabled contributor

And his children To deceased contributor’s

widow/widower, and orphaned children Provides lump sum death benefit to

deceased contributor’s estate


Contribution to CPP Specified

percentage of employee’s contributory earnings

Employer matches employee’s contributions

Non-refundable tax credit of 17% of year’s contributions

Contribution rates1996 2.8%2000 3.9%2001 4.3%2002 4.7%2003 4.95%2004 4.95%2005 4.95%2006 4.95%2007 4.95%


Contributory Earnings Earnings above YBE and below YMPE Year’s basic exemption: YBE

Frozen at $3,500 Beneficial to low-income earners

Yearly maximum pensionable earnings: YMPE For 2007, $43,700

Adjusted annually to reflect increase in wages


Maximum Contribution, 2007 $1,989.90

90.989,1$

200,400495.

500,3700,430495.

exemption basic-earnings epensionabl maximumrateon contributi

earningsry contributo maximumrateon contributi



Monthly Retirement Pension With Retirement at Age 65 Related to past contributions

Made on pensionable employment earnings

Maximum benefit $863.75 in 2007 25% of YMPE of last 5 years

All benefits are taxable income


Monthly Retirement Pension With Retirement at Age 60-65 Must be substantially ceased working

Earning less than the maximum pension payable at age 65

Month before pension begins, and Month pension begins

Pension reduced by 0.5% for each month the start date precedes the 65th birthday Maximum reduction 30%


Monthly Retirement Pension With Retirement Age 66-70 Do not need to cease employment Pension increased by 0.5%

For every month the start date exceeds the 65th birthday


Survivor Benefits, 2007 Death benefit

Payable to the estate Six times the contributor’s monthly pension

Maximum $2500

Survivor’s benefit Maximum under age 65

$482.30 per month Maximum over age 65

$518.25 per month


Survivor Benefits, 2007 Orphan’s benefit

Up to age 18 25 if in approved educational institution

$204.68 per month


Disability Benefits, 2007 Must have made CPP contributions in 4

of last 6 years Converted to retirement pension at 65 Flat rate plus 75% of contributor’s

retirement pension Maximum benefit $1053.77 Greater than the retirement benefit

Pension for children of disabled contributor Maximum benefit $204.68


Recent Changes From pay as you go

This year’s contributors pay for this year’s pensions

To steady-state funding Rapidly increasing rates Build up a large fund Investment in the market


The Old Age Security System


Overview of OAS System Operated/funded by the federal

government Recipients do not contribute

Basic, guaranteed retirement income Includes three public pension

benefits1. Old age security (OAS)2. Guaranteed income supplement (GIS)3. Spouses allowance (SPA)


1. Old Age Security (OAS) Pension Introduced 1952

Applies universally to all Canadians Even if pensioner leaves Canada permanently As of July 1, 1997

Full pension after 40 years of residency after age 18 Maximum benefit

January - March 2007 - $491.93 per month Indexed quarterly to CPI Taxable income


Clawback of OAS Pension Repayment of OAS benefits Special 15% tax introduced in 1989

If net income higher than threshold $63,511 in 2007 Indexed annually to the extent CPI exceed

3% annually OAS benefits reduced to zero

With $102,865 of net income


2. Guaranteed Income Supplement (GIS) Introduced 1992 Paid to low-income pensioners

In addition to OAS benefits Must pass the net income test Must be applied for each year

Indexed quarterly to CPI Not considered taxable income

Must be reported as part of total income but subsequently deducted


GIS Benefits January 1, 2007 Single individual

Or person whose spouse/common law partner is not receiving OAS or SPA

Maximum benefit $620.91

Spouse/common law partner of pensioner Maximum benefit $410.04

Benefits cease Absent from Canada for more than six months


GIS clawback of Benefits 50% clawback

Benefit reduced by $1 for every $2 of previous year’s net income

At net income of $14,901.84 Maximum single benefit entirely

clawed back


2. Spouses Allowance (SPA) Benefits to spouses who are/were

married to GIS recipients Pensioner’s spouse, common law

partner, widow, widower Spouse must be aged 60 to 64 Allowance terminated at age 65

Or if recipient dies or remarries Spouse must pass the net income

test


SPA Benefits Benefit $901.97 per month January

2007 Equivalent to maximum OAS

benefit plus maximum GIS benefit Not considered taxable income

Must be reported as part of total income but subsequently deducted


SPA clawback of Benefits 75% clawback

SPA benefits reduced $3 for every $4 of couple’s combined

income from other sources


Tax Assistance for Retirement Planning


Tax Advantageous Vehicles Sanctioned by the income tax act

Encourage employees/employers to save

To provide a retirement income

Contributions and accumulating interest Exempt from taxation until withdrawn

as income


Types of Tax Advantageous Vehicles Registered pension plans, RPP’s

Employee contributions first became tax deductible in 1919

Registered retirement savings plans, RRSP’s First available in 1957

Deferred profit sharing plans, DPSP’s To which employers could make contributions

on behalf of employees on a tax deferred basis


Registered Pension Plans


Two Types of RPP’s Defined-benefit pension plans Defined-contribution pension

plans


Defined-benefit Plans Generally contributory plans

Contributions by employer and employee

Limited contributions per year Amount to fund a maximum benefit of

$2,222 per year of service Past service contributions

permitted


Defined-benefit Plans Specified annual pension at

retirement Value of benefits related to years of

service and earning levels Maximum benefit of $2,222 per year of

service Employer has pension liability to fund

To ensure that the future pensions are adequately secured


3 Basic Forms of Defined-benefit Pension Plans

1. Career-average pension plans2. Final and best earnings pension

plans3. Flat-benefit pension plans


1. Career-average Pension Plans

Benefits related to career average earnings and years of credited service


2. Final and Best-earnings Pension Plans Final-earnings pension plans

Benefits related to earnings in final three to five years of credited service

Best-earnings pension plans Benefits related to average of the

best three to five years of credited service


3. Flat-benefit Pension Plans Retiring members receive a flat

rate benefit regardless of earnings


Defined-contribution Plans Specified contributions

By employer and employee Past service contributions not

permitted Unspecified amount of pension

Employer doesn’t promise specific pension amount

Less obligation on the part of the employer No pension liability on part of employer


Maximum Contributions for Defined-contribution Plans Combined contributions must not

exceed the money purchase limit Limit is the lesser of

18% of earned income of preceding year

$20,000 in 2007

Copyright © 2008 Pearson Education Canada 6-1 Chapter 6 Retirement Income.

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