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 Summer 2000

Introduction to Retirement Income

RETIREMENT INCOME IN CANADA is made up of three parts: public pensions consisting of the Old Age Security Pension and the Canada Pension Plan, Registered Retirement Savings Plans (RRSP’s) and Registered Pension Plans (RPP’s).

The Old Age Security Pension is provided to all Canadians who meet certain residency requirements. It provides a set minimum income to its recipients; however, those with high retirement incomes will have their benefits progressively "clawed back" so that at a certain income level they will be totally eliminated.

For Canadians with incomes below a certain threshold, additional Old Age Security programmes have been developed to assist those in need. These include the Guaranteed Income Supplement for low-income pensioners, the Spouse’s Allowance for their spouses and the Widowed Spouse’s Allowance for those whose spouses have passed away.

The Canada/Quebec Pension Plan is for residents who have earned employment income over their working lives. In order to qualify a member must have worked and made contributions to the plan thereby ‘building up credits for contributory periods. Those credits, up to a maximum level, are used to determine the benefits that will be received upon retirement.

For the most part, the Canada Pension Plan is similar to its Quebec counterpart. Both provide a benefit that is approximately equal to 25% of the retiree’s pre-retirement salary up to the year’s annual maximum pensionable earnings. These are based on Canada’s average industrial wage for the year.

In addition to the above, all of the provinces have established programs to assist those who are still in need even after qualifying for the above benefits.

A Registered Retirement Savings Plan is a government sanctioned income tax shelter or income tax deferral mechanism that allows Canadian individual taxpayers to deduct, from income subject to income tax, specifled amounts that have been contributed to the plan. These earnings accumulate in the plan free of current income tax.

When the taxpayer reaches a prescribed mandatory age in a particular year (current age 69), he must convert his plan into retirement income by the end of that year and the retirement income payments must commence in the following calendar year.

The taxpayer need not wait until age 69 to commence receiving the retirement income, although as a practical matter, taxpayers prefer to allow their contributions to remain income tax sheltered for as long as they do not need the proceeds to live on.

Before the taxpayer begins to receive a retirement income he must first convert his plan to either a Registered Retirement Income Fund (RRIP) or an annuity. Alternatively, he may choose to withdraw the funds in their entirety in cash. If he chooses this option, the realized funds will be included in income and income taxes will be due on the total amount.

The RRLF is essentially a continuation of the RRSP. The taxpayer is required to receive and take into income a specified minimum amount of his RRIF each year until such time as the fund is depleted.

Alternatively, a lifetime annuity may be purchased with the proceeds of the fund. These will provide monthly withdrawals that must be taken into income and taxed upon receipt.

Registered pension plans, the subject of most of this newsletter, are established by a sponsor, typically an employer or trade association, which makes income tax deductible contributions, within limits established by government regulation, into an investment fund. The plans may also require contributions by members and these too are ordinarily income tax deductible to the contributor.

Many plans also include "buy-back" options which allow contributors in some circumstances to make up for years in which they were not covered by the plan or for years which can now earn more benefits than were provided at that time.

When the pension plan is sponsored by a large employer, the eventual pension received by the employee will be based upon a formula that usually involves the number of years in which contributions have been made and the employee’s annual salary in his last few years of employment. When the pension plan is sponsored by a trade association, the eventual pension received by the contributor will usually be based on amounts contributed to the plan on behalf of the member each year plus some Investment component that such funds will have earned under the plan’s administration.

SUMMER 2000: Introduction to Retirement Income | Pension Plans: The Nuts and Bolts | Show Me the Money | The Effects of Inflation on Pension Benefits |Sample Pension Statement

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