Retirement Benefits - CPP, OAS and GIS

Retirement

This year, 2011, marks the year the first of the baby boomers turn 65. Baby boomers are those who were born between 1946 to 1964. So in this edition of the newsletter, I thought it would be good to talk about retirement since we’ve just finished the RRSP season.

When you retire, you qualify for some government pension or benefits like CPP, OAS and GIS. So what are they and how do they work? Here’s a summary.


CPP – Canada Pension Plan

A CPP retirement pension is a monthly benefit paid to people who have contributed to the Canada Pension Plan. The pension is designed to replace about 25% of a person's earnings from employment, up to a maximum amount. For 2010, the maximum amount iwas $934.17. Not very much is it?

But there’s good news! CPP has increased their maximum benefit. For 2011, the maximum CPP benefit you can get is $960.00. Woohoo!

And if you qualify, you can get Old Age Security (OAS) benefit as well, up to $524.23 and Guaranteed Income Supplement (GIS) of $661.69 for a total of $2,145.92.

If you have no mortgage and no debts, you can probably live comfortably on $2,145.92 per month today.

But wait! Before you think that your retirement is taken care of, consider this; if you are living in the Greater Vancouver Area. You are living in the city that has highest cost of living across all provinces.

If you also think you qualify for the maximum for CPP, OAS and GIS. Consider this as well. To be eligible to receive the maximum CPP, there are 2 criterias: Time and Contribution.

Time
The first criterion is that you must contribute at least 40 years between 18 to 65 years old. If you migrated here after you are 18 or started working only after you finished college, then you won’t get the maximum.

Contribution
Every year you work and contribute to CPP between ages 18 to 65, you add to your benefit. To qualify for the maximum, you must not only contribute to CPP for 40 years but you must contribute enough based on what CPP calls the Yearly Maximum Pensionable Earnings (YMPE). For 2010, the YMPE is $47,200.

If you make less than $47,200, you don’t qualify for the maximum because you haven’t contributed the maximum CPP.

You only qualify for the maximum if you retire at age 65. If you decide to retire earlier and get your CPP, your benefits are reduced by 0.5% for each month before age 65 to a maximum of 30%.

So if you decide to retire at age 60, you get 30% less CPP or if you retire at age 63, you get 12% less (0.5% x 24 months).

On the other hand, if you retire after age 65, you get 0.5% more for each month after age 65 to a maximum of 30% or age 70.

Here is a link on how your CPP is calculated.

http://www.servicecanada.gc.ca/eng/isp/cpp/soc/50-70/yourcpp.shtml

If you took some time off work due to pregnancy, you can apply for the child rearing drop out to increase your benefit.

http://www.servicecanada.gc.ca/eng/isp/pub/factsheets/chidropout.shtml

If you were not working or you just happen to migrate to Canadaafter 18 years old, CPP takes off the low earning years in their calculation to help increase your qualified CPP benefit.

The CPP protects your pension by making certain adjustments before calculating 25% of the earnings you contributed over your working life. For example, some low-earning periods during your career may be "dropped out," so they do not reduce the amount of your pension.


OAS – Old Age Security

The Old Age Security program provides you with a modest pension at age 65 if you have lived in Canada for at least 10 years.

The Old Age Security program is financed from Government of Canada general tax revenues.

You may be able to collect OAS indefinitely outside Canada if your OAS has been approved and you’ve lived in Canada for at least 20 years after age 18. Otherwise, payment may be made only for the month of a pensioner's departure from Canada and for six additional months, after which payment is suspended. The benefit may be reinstated if the pensioner returns to live in Canada and meets all conditions of eligibility.

http://www.servicecanada.gc.ca/eng/isp/oas/oasoverview.shtml


GIS – Guaranteed Income Supplement
The Guaranteed Income Supplement provides additional money, on top of the Old Age Security pension, to low-income seniors living in Canada. To be eligible for the GIS benefit, you must be receiving the Old Age Security pension and meet the income requirements.

http://www.servicecanada.gc.ca/eng/isp/pub/oas/gismain.shtml


Payment Rates

Here are something interesting facts to know.

The average CPP benefit in 2010 is $504.50. The average OAS is $490.47 and the average GIS is $452.04 for a total of$1,447.01.

That’s a far cry from $2,145.92. I’m not even sure if you can live off $1,447.01 a month even without a mortgage.

But…

The CPP benefit is indexed to the Consumer Price Index (CPI) and is adjusted once a year.

http://www.servicecanada.gc.ca/eng/isp/pub/factsheets/cpicpp.shtml

OAS is indexed to the Consumer Price Index (CPI) and is adjusted four times a year.

http://www.servicecanada.gc.ca/eng/isp/oas/tabrates/cpioas.shtml

Here are the current rates for CPP and OAS

http://www.servicecanada.gc.ca/eng/isp/pub/factsheets/rates.shtml

http://www.servicecanada.gc.ca/eng/isp/oas/oasrates.shtml


Qualifications

GIS is intended for low-income seniors living in Canada. (The link is based on 2006 rates)

http://www.servicecanada.gc.ca/eng/isp/pub/oas/lis/qualify.shtml

For 2011, if you make over $15,888 a year, you don’t qualify for GIS.

http://www.servicecanada.gc.ca/eng/isp/oas/oasrates.shtml

If your income is over $67,668, your OAS is going to be reduced or “clawed back”. You will have to pay back 15% of the excess of this amount. Here’s a sample calculation.

http://www.servicecanada.gc.ca/eng/isp/pub/factsheets/oasrepay.shtml


Taxes

Like most retirement income, your CPP benefit is considered a taxable income.

http://www.servicecanada.gc.ca/eng/isp/pub/factsheets/retire.shtml#taxation_cpp_benefits

OAS is also taxable

http://www.servicecanada.gc.ca/eng/isp/pub/oas/oas.shtml#five

GIS is not taxable, but must be reported in your tax return.

http://www.servicecanada.gc.ca/eng/isp/pub/oas/gismain.shtml#f

It’s funny that when you get CPP and OAS which is already low, it is also subject to tax. And when you have more income, your OAS is “clawed back” and you don’t get GIS.

RRSP withdrawal is considered an income and is taxed. Any income you receive from your RRSP affects your OAS and GIS if you go over a certain income level.

Why is it that the government penalizes (taxes) you on your savings and then cuts your benefit (OAS and GIS) if you have a lot of savings? That makes it less attractive to actually save right? Yes and no.

Does it make you wonder if it’s even wise to contribute to your RRSP?

The answer is…it depends.

It depends on how much you’ve saved and your individual situation. You may want to contribute to an RRSP to reduce the taxes you pay today. Sometimes, it may not even be advantageous to contribute to an RRSP if you have low income.

Because of this, a new savings plan came out called the Tax Free Savings Account or TFSA.

The TFSA is a flexible, registered general-purpose savings vehicle that allows Canadians to earn tax-free investment income to more easily meet lifetime savings needs.

There are several investment options in a TFSA such as mutual funds, GICs, stocks and bonds. But remember, when you invest in stocks in a TFSA, like you cannot use capital losses inside a TFSA to offset future capital gains.

Income and withdrawals from a TFSA is tax free and does not reduce any of your government benefits like OAS, GIS and the Canada Child Tax Benefit.

So the final question is, will CPP be there when you retire? Here’s a link to the CPP Investment Board explaining the status of CPP.

http://www.cppib.ca/News_Room/News_Releases/nr_01200401.html

If you like to know more, talk to your financial advisor.