Canada’s retirement income system
Your income during retirement will typically come from three main sources:
- the Canada Pension Plan (CPP) or Quebec Pension Plan (QPP)
- the Old Age Security (OAS)
- employer-sponsored pension plans and personal savings and investments
You may hear these called the “three pillars” of Canada’s retirement income system.
You’ll need to know how much money you may get from these sources to be able to plan for your retirement. You’ll also need to consider what to do with your personal savings at certain stages in your life.
You should start thinking about all of these things before you retire. This will help you figure out when you can comfortably retire, and how much money you can expect to have when you do.
Canada Pension Plan (CPP) or Québec Pension Plan (QPP)
The Canada Pension Plan (CPP) and Québec Pension Plan (QPP) provide monthly payments to people who contributed to the plans during their working years.
CPP contributions are managed by the Canada Pension Plan Investment Board (CPPIB). The CPPIB invests these contributions to ensure there is enough money in the plan to provide payments to both current and future Canadian retirees.
The amount you’ll get every month depends on how long you contributed to the plan and how much you contributed. It also depends on the age when you start receiving your CPP or QPP retirement pension.
You can choose to take your CPP or QPP as early as age 60 or as late as age 70. The earlier you take your CPP or QPP, the lower your monthly payments will be. The later you take your CPP or QPP, the higher your monthly payments will be.
Old Age Security (OAS) pension
The Old Age Security (OAS) pension is a monthly benefit for Canadians who are 65 or older. You can get OAS benefits even if you’re still working or have never worked.
You don’t need to contribute to the OAS pension in order to benefit from it. You can start to receive OAS at age 65 or choose to defer for up to 5 years. For every month you delay receiving your OAS pension, the higher the monthly payment will be.
You’ll typically be eligible for the OAS pension if you are a Canadian citizen or legal resident and have lived in Canada for at least 10 years. The amount you will get from the OAS pension depends on how long you lived in Canada after the age of 18. You will typically be eligible for the maximum amount if you lived in Canada for 40 years or more.
You may be selected for auto enrolment in the OAS pension. This means that you won’t have to apply to start receiving your OAS pension. You will receive a letter a month after you turn 64 years old telling you if you are chosen for auto enrolment in the OAS pension. You can still defer receiving your OAS pension if you are eligible for auto enrolment.
If you don’t get a letter telling you that you are eliglble for auto enrolment then you will have to apply for the OAS in writing by completing and mailing in the application form.
Guaranteed Income Supplement (GIS)
The Guaranteed Income Supplement (GIS) provides a monthly non-taxable benefit to Old Age Security (OAS) pension recipients who have a low income and are living in Canada. You need to file your income tax return every year to be eligible for the GIS, even if you don’t expect to have to pay extra taxes.
If you were automatically enrolled for the OAS pension then you will automatically be considered for the GIS as long as you file your income tax return each year.
If you were not automatically enrolled in the OAS pension then you will need to apply for the GIS in writing.
Allowance for people aged 60 to 64
The Allowance is a benefit available to Canadians between the ages of 60 and 64 who have a low income. You may be eligible for the Allowance if your spouse or common-law partner receives the OAS pension and is eligible for the GIS.
Employer-sponsored retirement and pension plans
Your employer may sponsor a retirement plan, such as a group Registered Retirement Savings Plan (RRSP) or a registered pension plan (RPP). These are both registered plans that provide you with a source of income during your retirement.
Under these plans, you and your employer (or just your employer) regularly contribute money to the plan. When you retire you may be eligible to receive either a regular income from the plan or a lump sum of money that you can convert into an income.
Speak to a human resources advisor or pension plan administrator to find out how your employer-sponsored retirement or pension plan works.
Personal retirement savings and investments
Two common sources of personal retirement income are Registered Retirement Savings Plans (RRSPs) and Tax-Free Savings Accounts (TFSAs). RRSPs and TFSAs can be made up of various savings or investment products.
You may also receive income from non-registered sources, such as personal investments like stocks and bonds, or personal savings accounts.
Registered Retirement Savings Plans (RRSPs)
A Registered Retirement Savings Plan (RRSP) is a savings plan designed to help you save for retirement. RRSPs help you grow your money while offering tax benefits. For example, you may get a deduction on your income tax, depending on your income and the amount you contribute. You also don’t have to pay tax on the money you earn as long as it stays in your RRSP.
You can claim a deduction on your income tax return for RRSP contributions up to your RRSP deduction limit. This limit is typically 18% of your earned income for the previous year (up to a maximum amount that is set by the Government of Canada).
Money taken out of an RRSP is considered income. This means that you may have to pay tax on it. This can also impact the amount of money you receive from government benefits that are based on your income, such as the Old Age Security pension (OAS) and the Guaranteed Income Supplement (GIS).
There are some programs that allow you to take money out of an RRSP without having to pay tax. For example, if you use the money to buy a house or to pay for your or your spouse’s post-secondary education. You’ll have to follow special rules and put the money back in your RRSP within a certain period or you will have to include it as income and may have to pay tax on it.
Tax-Free Savings Accounts (TFSAs)
A Tax-Free Savings Account (TFSA) can also hold a wide range of investment products and allows them to grow tax-free. This means that you don’t have to pay tax on income from investments held in your TFSA, including interest, capital gains or dividends. You also don’t have to pay tax when you take money out of a TFSA.
Money earned or taken out of a TFSA is not considered income. This means that it will not impact the amount of money you receive from federal government benefits that are based on your income, such as the Old Age Security pension (OAS) and the Guaranteed Income Supplement (GIS).
There is a maximum amount that you can contribute to a TFSA each year without having to pay a penalty.
Turning your savings into retirement income
You’ll need to decide how you want to convert your savings and investments into retirement income. You should start thinking about these things before you retire so you can have a better understanding of what your options are and how much money you may have.
Some options include:
- converting an RRSP into a Registered Retirement Income Fund (RRIF)
- buying an annuity
- investing your money in other products, such as stocks or bonds
- withdrawing your savings as cash
You may be able to convert some of your retirement savings into income before you retire. This can help you transition from working to retiring.
Think about your other sources of retirement income before deciding how to use or invest your savings. Your other sources of retirement income can impact the amount of money you receive from government benefits and pensions that are based on your income.
For example, let’s say you are a Canadian with a low income and receive the Guaranteed Income Supplement (GIS). If you withdraw a large amount of money from an RRSP or an RRIF, then you might not be considered low income for the next year. You may receive a lower GIS payment, or you could no longer be eligible for the GIS in that year.
If you think you may earn a low income when you retire and will qualify for the GIS, then a TFSA may be a better savings option for you than an RRSP.
Everybody’s retirement situation is different. Speak with a financial professioanl before you retire for help figuring out what will work best for your retirement.
Getting money from your home
If you own your home and you’re looking for additional income in retirement, you may be able to use the equity you built up in your home.
Selling your current home and buying a less expensive one
Selling your home and buying a less expensive one can provide you with extra money in retirement. This is often called downsizing.
You may save money in rent or mortgage payments, or free up some of the money that is invested in your home, by moving into a less expensive home. You may also pay less for utilities such as heating and electricity. However, remember that there are many fees and costs associated with buying and selling a home.
Getting a reverse mortgage
A reverse mortgage allows you to get money from your home’s value without having to sell your home. You are given a loan that is secured by the equity in your home and don’t have to make payments on the amount you owe until the loan is due. This is usually when you move out of your house, sell it or pass away.
Reverse mortgages are available to homeowners 55 years old and older. The costs associated with a reverse mortgage may be high.
Before choosing this option, make sure you understand if this type of loan is best for you.