By Heather Holden : In thinking about your ‘salary’ in retirement, you’re probably starting with the income that is guaranteed. But do you know how much to expect or how to calculate the reduced amount you’ll likely receive? Do you have a good sense of the impact on your taxable income?
With very few exceptions, if you live in Canada, are employed and over the age of 18, you’re paying into the Canada Pension Plan. Contributions are split equally between employers and employees. Self-employed people pay as both the employer and the employee.
The amount you pay into the CPP is based on your salary (your pensionable earnings). The minimum you must pay is $3,500 and the maximum is adjusted annually every January.
How much can you expect monthly in retirement?
In general, your retirement pension replaces about 25% of your pensionable earnings (the earnings on which your CPP payments were calculated while you worked). The exact amount of your CPP pension depends on how much and for how long you contributed.
The current maximum amount you’ll receive is $960/month (with the average payment being $512 in 2011 according to the Service Canada website). And yes, this is fully taxable income.
Can you share your CPP income for tax efficiency?
Yes indeed. You’ll be able to share your pension income with your spouse or common law partner equally if you’re at least 60 years of age and have both applied for retirement pensions. This may help you reduce your overall taxes if one spouse is in a lower tax bracket than the other.
The Service Canada website is a good source of information about CPP for you: www.servicecanada.gc.ca.
What about Old Age Security?
OAS is also a federal government program that provides a basic amount of retirement income to all people in Canada who meet certain residency criteria. Unlike the CPP, the amount of OAS income you’ll receive in retirement is not based on your past employment or your previous salary.
But just like CPP, OAS income is fully taxable.
Who gets OAS income?
If you’re a Canadian citizen or a legal resident of Canada, you’re at least 65 years old, and you’ve been in Canada for at least ten years after the age of 18, you’re eligible to receive OAS income in retirement.
How much can you expect?
That depends on your other sources of income in retirement. OAS is referred to as ‘income-tested’ meaning that if your retirement income is over a certain amount, you’ll receive a lower OAS payment.
The current maximum OAS income is $533/month (the average payment is $495/month according to the Service Canada website).
If your income in retirement is more than about $67,500 this year, your OAS income will start to be ‘clawed back’, meaning you’ll receive less than the maximum possible amount. And if your income in retirement is over about $110,000 you won’t receive any OAS income.
These amounts are adjusted annually, so if retirement is a distant thought, just use those numbers as a general guide.
The Service Canada website is also a terrific source of information on OAS, so take a look: www.servicecanada.gc.ca.
And of course call or email me at Heather_Holden@ScotiaMcLeod.com with questions and if I don’t know the answer, I’ll be able to point you in the right direction!
Heather Holden, PhD, CIM