Canadian Pensions

Pensions in Canada – Canada Pension Plan – Old Age Security – Registered Retirement Savings Plan


Getting a Retirement Pension in Canada

Canadian residents enjoy a variety of options when it comes to financing retirement. These options are:

›› federally financed plans
›› tax deferred savings
›› employer sponsorship programs

Canada’s retirement age is 65.

For most people the Canada Pension Plan (CPP) is the first port of call for retirement income.

Employees may stop working after their 65th birthday and begin receiving their CPP. However, it is possible to take a reduced pension as early as age 60 or receive an increased pension after age 65.

(Many Canadians retire before they reach 65, so we shall also look at earlier retirement options.)

Canada Pension Plan (CPP)

›› The Canada Pension Plan is a monthly benefit paid to Canadian residents.
›› The amount of pension you receive depends on your earnings and how much you have contributed while working.
›› The CPP is classed as taxable income.
›› All employed Canadians adults contribute a defined fraction of their earnings to the CPP.

The contribution rate for employees to the CPP is 5.25% of gross employment income between $3,500 and $55,200 (2020) up to a maximum contribution of $2,898. These payments are matched by employers.

Self-employed people contribute 10.5% of their net income up to a maximum of $57960 (2020).

The CPP payment you are entitled to receive at 65 is one quarter of the average contributory maximum over your entire working life.

Some low-earning periods during your working life may be ignored so they do not result in your pension being lowered. The pension is intended to replace about 25 percent of your income from work.

Tax-Free Saving for Retirement
One of the benefits of having a Registered Retirement Savings Plan is that contributions are tax deductible. For example, if your maximum income tax rate is 40%, you will pay $400 less tax for every $1,000 you save in a Registered Retirement Savings Plan. The annual maximum contribution to your plan is capped at $27,230.

The Canada Pension Plan is capped at a maximum of $1175.83 per month (2020). Many people do not regard this as a satisfactory income.

In fact, according to Service Canada, the average monthly retirement pension (at age 65) in January 2020 was just $735.21.

CPP with lower benefits is available at the age of 60.

If you wish to receive your CPP before your 65th birthday you will have 0.6% of your pension deducted for each month early you apply for CPP.

if you receive your pension at aged 60, then your pension will have the maximum deduction applied at 36%.

CPP with increased benefits is available if you delay taking it until you are 70 years old.

If you postpone taking your CPP you can receive a benefit increase of 0.7% for each month you delay taking a pension. The maximum increase is 42%. No increases are available for delaying taking the pension beyond the age of 70.

Quebec has opted-out of the Government of Canada’s program. Instead, residents of Quebec may receive the Quebec Pension Plan (QPP) with similar characteristics to the Canada Pension Plan.

Old Age Security (OAS)

The Old Age Security pension is the second of Canada’s federal pension plans available at the age of 65. However, unlike the Canada Pension Plan, it is a pension that is available to low-income seniors and immigrants who have not contributed to the CPP fund through taxation of income.

Old Age Security pension can be deferred for up to five years. If you delay receiving your Old Age Security pension, your monthly pension payment will be increased by 0.6% for every month you delay receiving it, up to a maximum of 36% at age 70.

In order for Canadian residents to qualify for the Old Age Security pension, they must have lived in Canada for at least ten years after their 18th birthday or must have lived in Canada for at least twenty years after their 18th birthday if they are currently residing overseas.

The Old Age Security pension yields a much lower basic maximum monthly benefit of $615.53 as of 2020, but is much more accessible to those who have not earned taxable income throughout their life in Canada.

Receiving Old Age Security does not hinder one’s ability to work. Single pensioners can receive a maximum net income of up to $79,054 a year (2020). Earnings or any income above this amount result in benefit deductions, ‘clawback’, or a full benefit suspension if the net income exceeds $128,137.

Registered Retirement Savings Plan (RRSP)

Available as both individual and spousal accounts, a registered retirement savings plan allows Canadian residents to privately contribute funds towards retirement. RRSP accounts may be opened at any of Canada’s “big five” banks or other institutions and can be paid into until the account holder is 71. For those wanting maximum control, self-directed RRSPs are opened through investment firms.

The Canadian Government caps the amount you can pay each year into your RRSP. In 2020, RRSP contributions are capped at the lower of: an annual maximum of $27,230 or 18% of your earned income in the previous year. The annual maximum historically increases each year with inflation.

When you reach the age of 71, the RRSP must be cashed in for its full amount or matured into a Registered Retirement Income Fund (RRIF) or used to buy an annuity.

Withdrawals are taxable at your current tax rate.

One of the benefits of having an RRSP is that contributions are tax deductible. For example, an employee who pays 40% income tax will pay $400 less tax should he or she contribute $1,000 into an RRSP.

Available funds in an RRSP account may be withdrawn tax-free for specific purposes as outlined through the Canadian Government’s two special withdrawal programs: the Home Buyer’s Plan (HBP) and the Lifelong Learning Plan (LLP).

Holders of RRSP accounts may withdraw up to $25,000 per year as tax-free income for the purpose of buying a home or up to $20,000 to undertake post-secondary education. However, these withdrawal programs are regarded as loans and the recipient of the funds must repay what he or she took out in a preset amount of time.

For the purpose of education, the “loan” must be repaid within ten years after the initial withdrawal date. For the purpose of purchasing a home, the loan must be repaid within 15 years. Funds not repaid by these dates must be declared as taxable income and will be subject to income tax payments.

In summary, RRSP contributions are tax-deductible while RRSP withdrawals are added to income and taxed.

About 6 million of Canada’s 18 million workers benefit from some form of registered pension plans (RPPs).

Supplemental Pension Plan (SPP)

Supplemental pension plans are available as employer to employee sponsorships. They come in two forms: defined benefit and defined contribution.

The value of a defined benefit SPP is often a fixed percentage your salary multiplied by the number of years you have been employed.

With defined contributions, it is more difficult to be precise about the plan’s value and your retirement income. These are determined by the value of the assets in the plan when you retire. Your employer pays a fixed percentage of your salary into your plan. Some employers may require you to match this contribution.

In 2017, defined benefit plans accounted for 67.0% of employees with a registered retirement savings plan. The majority of defined-benefit plans in Canada are held by public sector employees.

Defined contribution plans in 2017 accounted for 18% of all RRSP membership.

Around one million employess in 2017 were members of a hybrid defined benefit / defined contribution plan.

According to Statistics Canada:

“Although DC plans have some undeniable advantages for employees, their increased prevalence suggests a transfer of risk from employers to workers since 1991.”

You must be at least 55 years old to withdraw funds from a supplemental pension plan. As with other pension plans, you receive monthly payments for the duration of your life.

In the event that you leave a position before retirement age, you have the option to either allow the employer to manage the retirement funds in the SSP or transfer the available balance into an individual RRSP.