CPP ,OAS RRIF ANNUITY
OAS to Increase by $1.13
Seniors will see
an increase in their monthly OAS cheques in July, but they’ll have to resort to
the 99-cent menu to buy anything with the extra pension.
Old Age Security is indexed quarterly and seniors have seen no increases since
October of 2014.
The maximum OAS (for those who have been in Canada at least 20 years and
started on their 65th birthday) increases from $563.74 to $564.87 – an increase
of $1.13 per month or 0.2%. Seniors who qualify for the Guaranteed Income
Supplement or Allowance will also receive the 0.2% increase beginning in July.
Who Is Affected by the Ontario Retirement Pension Plan?
With the Ontario Retirement Pension Plan taking shape, the provincial government is giving Ontarians the chance to weigh in on the proposed provincial pension plan. The Ontario Liberals released a consultation paper on “key design questions” of the ORPP, such as low-income earners and the self-employed. The discussion paper provides more details on the ORPP, including who’s covered.Who’s Covered by the ORPP?
When the ORPP is in full swing, the provincial government anticipates three million people to make $3.5 billion each year in contributions. The ORPP looks to be mandatory for everyone except those with defined benefit pension plans and newer target benefit plans. Unlike defined contribution pension and group RRSPs, defined benefit pension plans provide you with a retirement benefit for your lifetime based on your earnings and your years of service. Target benefit plans are a middle ground between defined benefit and defined contribution – they act much like defined benefit, but your benefit could be reduced based on how the plan’s investments perform.
Employers that offer alternative retirement savings plans, such as defined contribution pension plans, group RRPSs and pooled PRPPs, would be forced to join the ORPP. This would be quite a financial burden for employers, who would have little incentive to continue to offer these plans, if they must also pay into the ORPP. The government looks to be open to discussion, mentioning employers may be able to adapt their pension plans to be exempt from the ORPP.Self-Employed Individuals
When the ORPP was first proposed, many self-employed individuals were concerned about the financial burden it would put on their business. According to the Ontario Ministry of Finance , 700,000 people in Ontario reported self-employment income in 2011. Currently, self-employed individuals don’t have the option of opting out of the CPP. If you’re self-employed, you must contribute both the employer and employee portion of the CPP.
If you’re self-employed in Ontario you can breathe a sigh of relief. It doesn’t look like you’ll be forced in to joining the ORPP. Self-employed individuals are ineligible to join because of the federal Income Tax Act. However, the provincial government is looking into a voluntary opt-in. This seems like a win-win situation for the self-employed. The ORPP would provide self-employed individuals with some stability in income in their retirement, provided they choose to join.
Unlike the self-employed, small business owners would be forced to join. When you’re starting up a business, cash flow is key. Forcing small business owners to join the ORPP could result in tough decisions. While many large employers are in the position to absorb the added cost of the ORPP, small businesses struggling to stay afloat may have to freeze wages or lay off employees to balance the books.Low-Income Earners
The ORPP looks to be similar to the CPP in many respects, including how low-income earners are treated. Similar to the CPP, if you earn below $3,500, you will not be required to contribute to the ORPP.
Similar to the CPP, the ORPP will count as taxable income toward means-tested government benefits like the Guaranteed Income Supplement. Instead of helping low-income earners, the ORPP could result in claw-backs to the GIS. Not only will low-income earners lose a portion of their GIS, they’ll also be forced to start contribution to the ORPP. With many of these folks struggling to pay for the necessities of life like rent and food, contributions to the ORPP will take money out of the pockets of those most in need.
There’s still plenty of time to weigh in on the newly-proposed ORPP.
ORPP is now a Legislative Requirement
Bill 56, an Act to require the establishment of the Ontario Retirement Pension Plan was introduced and received first reading in the Ontario Legislature on December 8, 2014.
With this Act, the Ontario Government is now committed to the implementation of the Ontario Retirement Pension Plan (ORPP) no later than January 1, 2017.
While the legislation is short on detail, it is specific on the broad base structure of the Plan and the requirements that will be part of the final legislation.
The Act requires:
• Establishment and implementation no later than January 1, 2017
• An obligation to create an administrative entity to administer the Plan
• Implements a requirement for any Employer, public body or the federal government to provide information, including personal information, deemed required by the Minister
• The collection of information is exempt from subsection 39(2) – Freedom of Information and Protection of Privacy Act
The legislation also establishes basic requirements of the Ontario Retirement Pension Plan:
• Maximum contribution rate of 3.8% combined from employee and employer
• Maximum threshold equal to $90,000 (in 2014 dollars), adjusted to reflect increases established from 2014 to 2017 under the Canada Pension Plan.
• Minimum threshold to be established
• The obligation to deduct contributions from salary and wages will provide for transition rules concerning the rates.
The Ontario Government intends, through questionnaires and public consultations, to collect the feedback of Ontario residents and employers on the final aspects and implementation of the Ontario Retirement Pension Plan
The Power of the TFSA
As the calendar year changed on January 1, so did the Tax Free Savings Account (TFSA) contribution room available to all adult residents of Canada.
Although indexing did not increase the earned contribution room, everyone can now contribute at least $5,500 more to their TFSAs. Those who made withdrawals in 2013 can now put back the money withdrawn in addition to the extra $5,500. For those who have never made a TFSA contribution, the accumulated TFSA room is now $36,500 (less if they are between 19 and 24).
Through the power of tax-free compounding the TFSA can yield spectacular results, especially for those who are young enough for compounding to do its magic.
If you’ve put the maximum into your TFSA at the beginning of each year and it earned 5% income in each year, your current balance (after your last deposit) will be over $40,800. See the table below.
YearContributionInterest EarnedEnding Balance2009$5,000$250.00$5,250.002010$5,000$262.50$10,512.502011$5,000$525.63$16,038.132012$5,000$801.91$21,840.032013$5,500$1,092.00$28,432.032014$5,500$1421.60$35,353.632015$5,500$1767.68$42,621.32
For the younger generation, consider the potential for a tax-free retirement. Making the maximum contribution each year starting at age 19 would yield a nest egg of about $900,000 at age 60 (assuming 5% annual return, 2% inflation, no change in maximum contribution levels and no withdrawals). Even in today’s dollars, that’s $400,000 in spending power. For a couple that’s $1.8 million dollars. Even assuming an extended 40-year retirement, that’s an indexed tax-free pension of over $74,000 a year ($33,000 in current dollars).
Four reasons why you should still take CPP early
I’ve written extensively about the issues around taking CPP early. It’s one of the big conundrums of Canada Pension Plan and my conclusion is that it still makes sense to take CPP as early as you can in most cases. Here’s four questions to ask yourself in determining if it makes sense to take CPP early.Will you still be working after 60? Under the old rules, you had to stop working in order to collect early CPP. The work cessation rules were confusing, misinterpreted and difficult to enforce so it’s probably a good thing they will be a thing of the past.
Starting January 1, 2012, you can start collecting CPP as soon as you turn 60 and you no longer have to stop working. The catch is that as long as you’re working, you must keep paying into CPP even if you are collecting it. The good news is that paying into it will also increase your future benefit.What is the mathematical break-even point?
Under the old rules, the decision to collect CPP early was really based on a mathematical calculation of the break-even point. Before 2012, this break-even point was age 77. With the new rules, every Canadian needs to understand the math. Here’s the example of twins that I used before, with the break-even point updated to 2015 values.
“Janet and Beth are twins. Let’s assume they both qualify for the same CPP of $502 per month at age 65. Let’s further assume, Beth decides to take CPP now at age 60 at a reduced amount while Janet decides she wants to wait till 65 because she will get more income by deferring the income for 5 years.
Under Canada Pension Plan benefits, Beth can take income at age 60 based on a reduction factor of 0.58% for each month prior to her 65th birthday. Thus Beth’s benefit will be reduced by 34.8% (0.58% x 60 months) for a monthly income of $327.30 starting on her 60th birthday.
Let’s fast forward 5 years. Now, Beth and Janet are both 65. Over the last 5 years, Beth has collected $327.30 per month totaling $19,638. In other words, Beth has made $19,638 before Janet has collected a single CPP cheque. That being said, Janet is now going to get $502 per month for CPP or $174.70 per month more than Beth’s $327.30. The question is how many months does Janet need to collect more pension than Beth to make up the $19,638 Beth is ahead? It will take Janet 113 months to make up the $19,638 at $174.70 per month. In other words, before age 74.4, Beth is ahead of Janet and after age 74.4, Janet is ahead of Beth.”
This math alone is still a very powerful argument for taking CPP early. Another way to phrase this question is, “How long do you expect to live?”
Note that under the new rules, the mathematical break-even point will change again in 2016, when the reduction factor will increase from 0.58% per month to 0.6%. So for the above example, in 2016, Beth would get $321 instead of $327.30 at age 60. This will move the break-even point from age 74.4 to age 74.When will you most enjoy the money?
When are you most likely to enjoy the money? Before age 74 or after age 74? Even though the break-even point is three years sooner, for most people, they live the best years of their retirement in the early years. I call these the ‘go-go’ years (which is one of three phases of retirement).
Some believe it’s better to have a higher income later because of the rising costs of health care. Whatever you believe, you should plan for. It might be worthwhile to look around your life and see the spending patterns of 70, 80 and 90 year olds to assess how much they are really spending. Are they spending more or less that they did when they were in their active retirement years.What happens if you Leave money on the table?
Let’s go back to Beth who could collect $327.30 at age 60. Let’s pretend that she gets cold feet and decides to delay taking CPP by one year to age 61. What’s happened is that she ”left money on the table.” In other words, she could have taken $3,927.60 from her CPP ($327.30 x 12 months), but chose not to, to be able to get more money in the future. That’s fine as long as she lives long enough to get back the money that she left behind. Again, it comes back to the math. For every year she delays taking CPP when she could have taken it, she must live one year longer at the other end to get it back. By delaying CPP for one year, she must live to age 75 to get back the $3,927.60 that she left behind. If she delays taking CPP until 62, then she has to live until 76 to get back the two years of money she left behind. Why wouldn’t you take it early given this math? The main reason is that you think you will live longer and you will need more money the older you get.My two cents
I think if people understand the math of Canada Pension Plan, most people will take it early. In 2012, you can take it early even if you are working. The bad news is you will get hit with a bigger reduction with the new rules. Some say its also bad news because you will have to keep paying into CPP if you are working (under the new rules). To me, that’s not such a bad thing because paying into it also increases your future benefit so it’s not like you are not going to get your money back. I don’t think the increased reduction is enough of a deterrent because a bird in your hand is better than two in the bush.
No Time To Waste: TFSA, RRSP or Both?
It’s February – no time to waste.
There are two very important investment opportunities to take advantage of now, but you’ll need to plan to put much of that February pay and your savings accounts to work for you now. The smart money goal: be sure to make your RRSP and TFSA contributions.
MAXIMIZE RRSP DEDUCTIONS – CONTRIBUTE BY MARCH 2. Dig out your 2013 Notice of Assessment to check out your personal RRSP Contribution Room before the contribution deadline of March 2, 2015. Did you maximize your RRSP Room? If not, you could fatten up your tax refund. The maximum contribution room you could have earned for 2014 is 18% of earned income up to $24,270. But your room may be higher if you haven’t maximized your contributions in the past.
But, be sure you don’t over-contribute. Excess contributions – the amounts over your RRSP room plus $2000 - are subject to a 1% per month penalty tax, which must be paid by March 31. Form T1-OVP is a bit of a nightmare, so see a tax pro for help.
TFSA SAVINGS ROOM UP TO $36,500. Despite the fact that there were no increases to additional contribution room for 2015, you can and should contribute an additional $5,500 to your TFSA as soon as possible this year. TFSA contribution room became available to Canadian adult residents on January 1, 2009, providing a total of $36,500 of available room since 2009 (4 years at $5,000 and 3 years at $5,500).
Contributions to a TFSA are not deductible, however income earned within a TFSA and withdrawals made from it are not subject to tax. TFSA activity does not affect eligibility for federal income tested benefits and tax credits, such as Old Age Security, the Guaranteed Income Supplement, the Canada Child Tax Benefit, the Working Income Tax Benefit and the Goods and Services Tax Credit.
TFSA contribution room accumulates every year, if at any time in the calendar year you are 18 years of age or older and a resident of Canada. You do not have to set up a TFSA or file a tax return to earn contribution room.
It’s Your Money. Your Life. You have every opportunity to set up your future to maximize your choices and live a peaceful financial life. Even if you can’t contribute the maximum to your RRSP or TFSA, try to increase your tax refund with an RRSP contribution before March 2. Then put that tax refund into a TFSA. Check with your designated tax specialists and financial professionals to make sure you are eligible.
Foreign Income Verification Reporting – Form T1135
Form T1135 Foreign Income Verification Statement is designed as an “information only” form tied with the personal tax return. While it is not actually part of the tax return, the due dates coincide with the due dates of tax returns, thereby tying it to the T1 return. When filing their tax return, the taxpayer identifies the need for filing the T1135 by their answer to the question “Did you own or hold foreign property at any time in 2014 with a total cost of more than CAN$100,000?” on page 2 of the T1.
Parts 1, 3, 5, and 6
In general, any individual, partnership, corporation, or trust which holds a foreign asset, is a beneficiary of a foreign holding or has a right to acquire a foreign holding is required to file the information return if the aggregate cost of the asset or holding exceeds $100,000. Reporting requirements for Parts 1, 3, 5, and 6 consist of the following information requirements:
• The country where the asset is held
• The maximum cost during the year of the holding
• The cost at the end of the year and,
• The amount of any income earned or lost on the holdings
“T” Slip Exclusion No Longer Available
In 2013, taxpayers had the option of using the “T” slip exclusion option. This consisted of the ability to not report individual holdings if there was a Canadian T5 or T3 slip issued for the income earned on the investment. This option is not available for 2014.
Part 2 – Shares of non-resident corporations (other than foreign affiliates)
This is one of the most difficult areas of form T1135 to complete; simply because accurate records of the information are difficult to obtain. This section no longer includes shares that are managed by a Canadian Registered Securities Dealer or Canadian Mutual Fund. These assets are now included in Part 7.
Include in this section any foreign share holdings that the taxpayer purchased on their own, either on-line or on a foreign stock exchange. Report both the cost and any income earned on the investment.
CPP – Now or Later?
One of the more difficult decisions for those approaching retirement is when to start receiving their CPP retirement pension.
In part 1 of this article, we will look at a number of factors that must be weighed to make that decision.
You can elect to begin receiving your CPP retirement pension as early as age 60 – but at a price. There is a penalty of 0.6% for each month the pension starts before your 65th birthday. Those who start at age 60 will suffer a penalty of 36% of their pension entitlement. Thus, if your Statement of Contributions from Service Canada shows that you would be entitled to a $1,000 per month pension at age 65, your pension will only be $640 per month if you start at age 60. If you continue to work after you receive your pension, you must still continue to contribute to CPP until age 65. After you reach 65, you can opt out of contributing if you’re already receiving your pension. On the bright side, those extra contributions will earn you a small additional pension called a post-retirement benefit.
If you delay starting your pension beyond your 65th birthday, you’ll receive a larger monthly benefit. Your pension will be increased by 0.7% for each month you delay – for up to 60 months. If you delay until your 70th birthday, your pension will be increased by 42%. For example, if you were entitled to a $1,000 per month pension at age 65, and you delay until age 70, your pension will be $1,420 per month. On the down side, you’ll have to continue contributing to age 70 if you continue to work. Those extra contributions will earn you an additional post-retirement benefit.
Perhaps the most difficult question to answer is “How long will I live?” The longer you live, the longer you’ll receive your pension and therefore the more you’ll get from CPP. A general rule of thumb is that if you’ll live beyond age 74, you will benefit from delaying the start of CPP. If you live to age 80 or beyond you’ll get more from CPP if you delay starting to age 70. The average Canadian who makes it to age 65 will live to about age 85.
When you die, the maximum death benefit from CPP is $2,500. If you have a spouse, they will be entitled to a survivor pension of 60% of the deceased taxpayer’s pension entitlement.
The maximum CPP retirement pension for 2015 is $1,065 per month (excluding any post-retirement benefit and increase for delaying). That maximum includes both the taxpayer’s own CPP retirement pension and any survivor pension that they are entitled to. This means that where both spouses have CPP pension entitlement, the amount of the survivor pension may be reduced or even eliminated.
Trust Legislation Enacted
inform their high net worth clients of recently enacted changes to tax benefits
arising from the use of trusts.
will require the review of their wills prior to the new rules taking effect on
January 1, 2016.
criticism of the federal budget proposals, on December 16, 2014 Bill C-43, Economic Action Plan 2014 Act,
No. 2 was enacted. When all of the provisions of the new
legislation come into force it will affect traditional estate planning in two
Rate Estates (GRE). Many traditional tax saving practices will only be
available to a Graduated Rate Estate (GRE). Only certain estates of deceased
persons qualify as GREs, and GREs can only last for up to 36 months.
Testamentary Trusts: The income of a spousal testamentary trust in the
year of death of the beneficiary spouse will be deemed to be the income of the
deceased beneficiary spouse and not the spousal trust.
to discuss the ramifications with your clients, as the effect of the
legislation may be objectively inequitable in certain circumstances. For
example, envision a case where the heirs of the deceased beneficiary spouse
(those who will end up paying the tax) are different from the residuary
beneficiaries of the spousal trust. In situations such as these, the heirs of
the deceased beneficiary spouse will pay the tax but will not receive the
assets. Currently, there is no remedy for this situation after the fact and
therefore estate planners would be prudent to advise their clients of this.
advisors may wish to argue that there should be certain grandfathering
provisions in the new legislation for wills that can no longer be changed; for
example, because the maker now lacks capacity or is already deceased (and the
will has not been probated).
These could be
devastating oversights that may lead to adverse tax results and/or expensive
UCCB Lucrative, But Complex
Effective January 1, 2015, the Universal Child Care Benefit will be increased from $100 per month to $160 per month for each child under the age of 6.
In 2006, the federal government implemented the Universal Child Care Benefit that provides all families for each child under the age of 6 with $100.00 per month. Effective January 1, 2015, the Universal Child Care Benefit will be increased from $100 per month to $160 per month for each child under the age of 6. The Universal Child Care Benefit has also been expanded to include children aged 6 to 17. The amount to be paid for each such child will be $60 per month. Remember, however, the UCCB is taxable.
However, in conjunction with this enhanced family payment, the Child Tax Credit, a non-refundable tax credit on Schedule 1 of the tax return will be replaced effective for 2015 and subsequent years. Now all families – no matter the income level - will benefit from the new UCCB, including families whose taxable incomes were too low to benefit from the Child Tax Credit. The Child Tax credit was introduced in 2007 based on a fixed amount per child under the age of 18 years. For 2014 the fixed amount is $2,255, which provides tax relief of up to $338 per child. However, this amount helps only those families that pay taxes. It won’t help those who didn’t.
As per the Department of Finance details released with the announcements, the net cost of enhancing the Universal Child Care Benefit and replacing the Child Tax Credit should be $0.7 billion in 2014-15 and $2.6 billion in 2015-16 (this is calculated as the increase in cost for the UCCB enhancement of $1.1 billion for 2014-15 and $4.4 billion 2015-16, less the savings the government reaps by replacing the CTC. That amounts to $0.4 billion 2014-2015 and $1.8 billion 2015-16).
But, there is a third wrinkle. With the elimination of the Child Tax Credit, the Family Caregiver Tax Credit for infirm children would also no longer be claimable effective January 1, 2015. This is not the intention of government and so amendments to the Income Tax Act will be made as required to ensure that a Family Caregiver Tax Credit for infirm minor children will be available.
Astute tax advisors will likely be in high demand, as a result of the multiplicity of changes coming to Canadian taxpayers and their families. Scheduling early appointments might be a good defence in 2015.
Family Tax Cuts Could Fatten December Coffers
It’s always a good idea to re-evaluate the requirement to make the December 15 quarterly tax instalment payment (December 31 in the case of farmers) but this year end it’s even more important because the introduction of the Family Tax Credit for 2014, which has the potential to reduce family taxes by up to $2000.
Who has to pay taxes by instalment? Those taxpayers whose net taxes owing is more than $3000 in 2014 and in either 2013 or 2012. Net taxes owing include personal income taxes plus CPP and EI premiums owing on self employment.
What’s different this year is that couples with children at home (under age 18) where one spouse is in a higher tax bracket than the other are likely to benefit from the Family Tax Cut of up to $2,000. The credit will be calculated on new form Schedule 1-A.
Timeless investment wisdom from The Intelligent Investor
“To invest successfully over a lifetime does not require a stratospheric IQ, unusual business insights or inside information. What’s needed is a sound intellectual framework for making decisions and the ability to keep emotions from corroding that framework.” –The Intelligent Investor, Benjamin Graham
If you only read one investing book in your lifetime, it should be Benjamin Graham’s The Intelligent Investor. Perhaps the greatest investing book ever written, the book will make you a better investor, whether you’re a do-it-yourselfer or you use an advisor.
Graham was a mentor for none other than Warren Buffett, the greatest investor of all time, and his book is filled with the kind of folksy wisdom that Buffett has become known for. Here are some of my favourite quotes from The Intelligent Investor.
“The sillier the market’s behavior, the greater the opportunity for the business-like investor. The intelligent investor is a realist who sells to optimists and buys from pessimists.”
Most people are financially inept, making mistake after mistake, and it has dire consequences to their financial and retirement planning. When making investment decisions, they zig when they should zag. Buy low, sell high? If you can set your emotions aside and buy when things look bad, your returns should improve measurably. Good investors see opportunity amid the carnage. Buy low, not high as many do.
“How your investments behave is much less important than how you behave….The investor’s chief problem – and even his worst enemy – is likely to be himself. “
Our own behavior is, indeed, our greatest threat as investors. Investment markets don’t determine our success, but it’s how we react to them does. Make rational decisions, not emotional ones. Buy good companies and keep them as long as they remain good investments. Trade rarely, unless it’s to buy more of those good companies when their shares tumble. Buy and hold, the Warren Buffett way.
“It should be remembered that a decline of 50% fully offsets an advance of 100%.”
“Never buy a stock because it has gone up or sell one because it has gone down.”
I love good (emphasis on good) investments when they suck. The more they suck the more I like them. If Company A or ABC Growth Fund is a good opportunity at $10 a share, surely it’s a great opportunity at $5 a share as long as nothing has changed to its fundamentals.
Market declines are your greatest opportunity to buy into a rising tide at reduced prices.
“Even the intelligent investor is likely to need considerable will power to keep from following the crowd.”
The crowd is generally wrong. You’ll be more successful being a contrarian than a follower.
“The best way to measure your investing success is not by whether you’re beating the market but by whether you’ve put in place a financial plan and a behavioral discipline that are likely to get you where you want to go.”
It’s not the specific investments you buy that determine your financial success. Do you have a written, goal-based financial plan? Do you buy more of your good investments when times are bleak and your investments are under siege? These things will put you ahead of the guy who chases returns.
“Before you place your financial future in the hands of an adviser, it’s imperative that you find someone who not only makes you comfortable but whose honesty is beyond reproach.”
Do-it-yourself investors believe that they will be more successful by saving a little on their fees but having a pro guide your decisions can be far more important. I believe that most investors have neither the ability nor the interest in managing their own investments, and the mistakes they invariably make scuttle their retirement dreams.
“A defensive investor can always prosper by looking patiently and calmly through the wreckage of a bear market.”
As Sir John Templeton said, the best time to buy is when blood is running in the streets. We can’t predict the exact market bottom, but when markets are down 30 or 40 per cent, maybe it’s time to start buying. Or set up a systematic investment where money is directed monthly from your chequing account to your investment portfolio so you’re buying at all times – in up and down markets.
“Successful investing is about managing risk, not avoiding it.”
Market volatility is the friend of the intelligent, patient investor because it provides great opportunities to buy into a rising tide at sale prices.
Wishing you financial success.
Seniors, Retirement and Debt
“This idea that a mortgage is forever is a bad plan; this idea that debt is forever is a really bad plan. Debt will only steal your golden years away from you.” – Dave Ramsey
With the oldest of the baby boomers now in their late 60s, it’s hardly surprising that Canada has a higher proportion of seniors than ever before. Currently, more than 5 million Canadians are over 65 and that number will continue to increase as more “boomers” reach their senior years.
Throughout their lifetime, the sheer size of the boomer generation has transformed the world around them with every step: education, the workplace and society have all changed dramatically since the first boomer was born in 1946. Now, as they move into their 60s, it’s hardly surprising that the boomers are also transforming retirement. Many of these changes are positive but one change that is not so positive is the growing number of seniors entering their retirement years with debt.
Debt levels have been on the rise in Canada since the early 1980s when credit became more easily available. Living in a society which accepts and encourages debt as a means to acquiring everything our hearts desire has enabled many people to live their lives in a manner that past generations could never have dreamed of. The boomers were the first generation to take full advantage of the opportunities that credit provided and, consequently, they are also the generation entering retirement with more debt than any other generation before them.
According to a recent Canadian study:
· 12% of seniors entering retirement still owe money on mortgages
· 14% of retired seniors owe money on lines of credit
· 16% of retirees are making payments on car loans
· 21% of seniors entering retirement have credit card debt
It’s no coincidence that, while access to credit has increased over the last 30 years, the savings rate in Canada has decreased. Many seniors entering their retirement years with debts just haven’t enough in savings to cover their debt payments and their living expenses. They are also incredibly vulnerable to fluctuations in interest rates which might increase their payments. This may be the reason why bankruptcy rates among Canadians aged 65 and older are currently higher than for any other age group.
Entering retirement with large amounts of debt creates a number of challenges for retirees. Firstly, it increases the amount of money that is needed each month in order to cover the cost of living. Higher expenses mean that either you need a larger amount of savings to draw from or you need to cut expenses in other areas in order to be able to cover debt payments. Secondly, many seniors are also providing financial support to their aging parents as well as to their adult children and this often adds to their debt levels and/or hampers their ability to pay down debts. It’s not surprising that so many retirees caught in this “sandwich generation” identify finances as a major source of stress.
As with so many aspects of retirement planning, the seeds of success are sown long before your retirement date. Taking control of your financial health, focusing on building savings and reducing debts is always a good idea but it is especially important in the years leading up to retirement. Heading into your “golden years” with as little debt as possible gives you the freedom to build a lifestyle that focuses on your financial needs not the needs of your creditors.
|How receiving a partial OAS pension affects GIS amounts
As you may be aware, seniors who have limited income aside from their OAS pension may be eligible for the Guaranteed Income Supplement (GIS), which is part of the Old Age Security (OAS) program.
If you have ever looked at the GIS rate tables on Service Canada’s website
, you may have noticed that the rates shown apply only if you are receiving the “full OAS pension.” The rate tables don’t really explain how much GIS you will receive if you’re receiving only a partial OAS pension (due to having fewer than 40 years of residence in Canada after age 18).
Receiving a partial OAS pension affects the amount of GIS that a pensioner will receive in two ways:
1. A pensioner receiving partial OAS will receive more GIS than someone receiving a full OAS pension, to make up for their lesser amount of OAS.
2. A pensioner receiving partial OAS will receive GIS up to a higher income, compared to someone receiving a full OAS pension
Why does someone receiving a partial OAS pension receive more GIS?
The intent of the GIS program is to ensure that anyone who is eligible for OAS receives at least a minimum level of income on which to live. There are various minimum monthly income levels established, depending on a pensioner’s marital status
For example, as of October 2014, the minimum monthly income level for a single OAS pensioner has been set at $1,328.14. If someone is receiving a full OAS pension ($563.74 for October 2014) and they have no other source of income aside from their OAS pension, that means that they will be entitled to GIS in the amount of $764.40 ($1,328.14 – $563.74).
However, if they are receiving only a partial OAS pension, that means that they must receive more GIS in order to reach that same minimum income level of $1,328.14.
Let’s use the example of Peter to see how this works. If Peter has resided in Canada for only 25 years when he becomes eligible for OAS, he will receive a partial OAS pension of $352.34 (25/40ths of $563.74). If he has no other income aside from OAS, he will be entitled to GIS in the amount of $975.80 ($1,328.14 – $352.34).
Why can someone receiving a partial OAS pension have a higher income before losing eligibility for GIS?
For the most part, the amount of GIS that someone is entitled to is reduced by 50 cents for every dollar of income that the person has from other sources (excluding the OAS). (The GIS rate tables actually function by reducing GIS by $1.00 monthly for every $24.00 of annual income.) If someone receives more GIS because they’re receiving only a partial OAS, it therefore follows that it requires a higher threshold before they lose all of their GIS entitlement.
Let’s use the above example of Peter to demonstrate how this works.
If a single pensioner receiving a full OAS pension has income of more than $17,088 annually from other sources, they won’t be eligible for any GIS. However, they will still receive their full OAS pension of $563.74.
If Peter has income from other sources totaling $17,088, he will need to receive GIS in the amount of $211.40 ($563.74 – $352.34), in order to be at the same overall income level as someone receive a full OAS pension.
Since his GIS will continue to be reduced by 50 cents for every dollar of other income that he has, that means that his GIS entitlement won’t be fully eliminated until he has a further $5,064 of income from other sources ($211 x 24). This means that the threshold for Peter to receive GIS is $22,152 ($17.088 + $5,064).
Is this situation fair?
It seems that the GIS top-up and higher income threshold for pensioners who have had their GIS topped up may put people who have lived their whole lives in Canada at a disadvantage, particularly since OAS payments are taxed and the GIS is not.
I have my own thoughts about the fairness of this situation, but I’m interested in hearing what other Retire Happy readers think.
3 Important Pension Plan Changes for Alberta
There are big changes on the way for pension plans in the province of Alberta. Alberta is the latest province to modernize its pension legislation, following in the footsteps of Ontario. These pension plan changes have been on the works for quite some time. B.C. will soon come out with new rules of its own.
Effective September 1, 2014, a number of new rules come into effect in Alberta. The new rules are far-reaching, impacting not only pensions plans registered in Alberta, but any provincially-regulated pension plans with Alberta members.
If you’re a plan sponsor with employees in Alberta, you’ll need to start following the rules. There are many pension plan changes but in this post, I highlight three key changes plan sponsors will need to follow effective immediately.
Following provinces like Manitoba, Ontario, and Quebec, effective September 1, 2014, Alberta members are now immediately vested. What is vesting? It means members are entitled to their full pension benefits when they leave an employer. Before the new rules, Alberta members had to wait two years to become vested. If an employee leaves on or after September 1, 2014, they’ll receive a pension payout. The new rules make it more costly for plan sponsors – members who were previously non-vested will receive a payout.
There are a number of things plan sponsors can do counteract the change. Plan sponsors may want to extended membership eligibility to two years. That way a member will have to accrue service for two full years before they can join the pension plan and be entitled to a payout. With the trend towards immediate vesting, to make pension administration easier, plan sponsors may want to consider offering immediate vesting across the board.
Unlocking: Small Pensions
The small benefit test has been changed in Alberta. If a member is vested and terminate their employment before their earliest retirement date, they’ll be able to choose to receive a pension payout in the form of a deferred pension or the commuted value. Normally a member’s pension is locked-in until retirement, unless it falls under the small pensions threshold.
Previously, there were two tests to see if a pension would be considered a small benefit. The first test that compared to the current year’s YMPE (Years Maximum Pensionable Earnings) to the annual pension at normal retirement date (NRD) has been eliminated.
The only test to see if a pension qualifies as a small benefit is now whether the commuted value is 20% or less of the YMPE in the year of termination. For example, if the annual pension at NRD is less than $10,500 (2014 YMPE: $52,500 X 20% = $10,500), then it’s considered a small benefit and the member is entitled to receive is as a cash lump sum or transfer their pension to a non-locked in savings vehicle like their RRSP. The new rules means there will be less small pensions, which means a greater number of plan members on the books.
Effective December 31, 2014, pension plans with Alberta members must start issuing inactive statements. The new rules require that annual statements are to be provided to retirees in pay (pensioners and surviving spouses). Similar to active statements, inactive statements must be provided 180 days after the pension plan’s year end (starting June 2015). Although this will create additional work for plan sponsors, the good news is that statements are not required for deferred vested members