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

  • Federally financed plans
  • Tax deferred savings
  • Employer sponsorship programs

Canada’s retirement age is 65.

Canada Pension Plan (CPP)

For most people, the Canada Pension Plan is the first port of call for retirement income.  Employees may stop working after their 65th birthday and begin receiving their CPP.  Many Canadians retire before they reach 65, so we shall also look at earlier retirement options.

The CPP 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 payment you are entitled to receive at age 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 CPP is classed as taxable income.

All employed Canadian adults contribute a defined fraction of their earnings to the CPP. The contribution rate for employees to the CPP is a 4.95% of gross employment income between $3,500 and $54,900, up to a maximum contribution of $2,544.  These payments are matched by employers.  Self employed people contribute 9.9% of their net income up to a maximum of $5,088.

CPP is capped at a maximum of $1,092 per month.  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 2011 was just over $550.

CPP with lower benefits is available at the age of 60.  If your 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.  The maximum deduction in 2016 is 36%. CPP with increased benefits is available if you delay taking it until you are 70 years old.  No increases are available for delaying taking the pension beyond the age of 70.

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 CPP, it is a pension that is available to low low-income seniors and immigrants who have not contributed to the CPP fund through taxation of income.  In order for Canadian residents to qualify for OAS 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 20 years after their 18th birthday if they are currently residing overseas.  The OAS pension yields a much lower maximum monthly benefit of $578, but it 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.

Registered Retirement Savings Plans (RRSP)

Available as both individual and spousal accounts, a registered retirement savings plan allows Canadian residents to privately contribute funds toward retirement. RRSP accounts may be opened at any of Canada’s ‘Big Five’ banks and can be paid into until the account holder is 71.  The Canadian Government caps the amount you can pay each year into your RRSP, and these caps have historically increased with inflation.  When you reach the age of 71, the RRSP much 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 in tax should he 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 (home buyer’s Plan and the Lifelong Learning Plan). Holders of RRSP accounts may withdraw up to $25,000 per year as tax-free income for the purpose of buying a home, or to undertake post secondary education.  However, these withdrawal programs are regarded as loans, and the recipient of the fund must repay what he or she took out in a pre-set amount of time

In summary, RRSP contributions are tax-deductible while RRSP withdrawals are added to income and taxed.  The annual maximum contribution to your plan is capped at 18% of earned income to a maximum of $26,010.

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 of 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 1991, 41 percent of all Canadian workers were covered by defined benefit plans.  The figure is now less than 30 percent, as defined contribution plans have become more popular with employers.  The majority of defined benefit plans in Canada are held by public sector employees.

Although defined contribution plans have some undeniable advantages for employees, their increasing prevalence suggests a transfer of risk from employees to workers since 1991.  You must be at least 55 years old to withdraw funds from a supplemental pension plan.  As with other pensions 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.