Copyright © 2008 Pearson Education Canada 6-1 Chapter 6 Retirement Income

Copyright © 2008 Pearson Education Canada 6-2 Sources of Retirement Income Public pensions Private pensions Investment income

Copyright © 2008 Pearson Education Canada 6-3 Canada’s Retirement Income System Canada Pension Plan Old Age Security System OAS GIS SPA Tax Assistance for Retirement Planning RPP’s DPSP’s RRSPs

Copyright © 2008 Pearson Education Canada 6-4 Canada Pension Plan Introduced in 1966 Social insurance program Administered by Federal government Paid for by employees and employers Earnings related program Based on five-year average earnings Not an income redistribution program As is the OAS system

Copyright © 2008 Pearson Education Canada 6-5 Canada Pension Plan Benefits Provides monthly pensions To contributor in retirement To disabled contributor And his children To deceased contributor’s widow/widower, and orphaned children Provides lump sum death benefit to deceased contributor’s estate

Copyright © 2008 Pearson Education Canada 6-6 Contribution to CPP Specified percentage of employee’s contributory earnings Employer matches employee’s contributions Non-refundable tax credit of 17% of year’s contributions Contribution rates % % % % % % % % %

Copyright © 2008 Pearson Education Canada 6-7 Contributory Earnings Earnings above YBE and below YMPE Year’s basic exemption: YBE Frozen at $3,500 Beneficial to low-income earners Yearly maximum pensionable earnings: YMPE For 2007, $43,700 Adjusted annually to reflect increase in wages

Copyright © 2008 Pearson Education Canada 6-8 Maximum Contribution, 2007 $1,989.90

Copyright © 2008 Pearson Education Canada 6-9

Copyright © 2008 Pearson Education Canada 6-10 Monthly Retirement Pension With Retirement at Age 65 Related to past contributions Made on pensionable employment earnings Maximum benefit $ in % of YMPE of last 5 years All benefits are taxable income

Copyright © 2008 Pearson Education Canada 6-11 Monthly Retirement Pension With Retirement at Age Must be substantially ceased working Earning less than the maximum pension payable at age 65 Month before pension begins, and Month pension begins Pension reduced by 0.5% for each month the start date precedes the 65th birthday Maximum reduction 30%

Copyright © 2008 Pearson Education Canada 6-12 Monthly Retirement Pension With Retirement Age Do not need to cease employment Pension increased by 0.5% For every month the start date exceeds the 65th birthday

Copyright © 2008 Pearson Education Canada 6-13 Survivor Benefits, 2007 Death benefit Payable to the estate Six times the contributor’s monthly pension Maximum $2500 Survivor’s benefit Maximum under age 65 $ per month Maximum over age 65 $ per month

Copyright © 2008 Pearson Education Canada 6-14 Survivor Benefits, 2007 Orphan’s benefit Up to age if in approved educational institution $ per month

Copyright © 2008 Pearson Education Canada 6-15 Disability Benefits, 2007 Must have made CPP contributions in 4 of last 6 years Converted to retirement pension at 65 Flat rate plus 75% of contributor’s retirement pension Maximum benefit $ Greater than the retirement benefit Pension for children of disabled contributor Maximum benefit $204.68

Copyright © 2008 Pearson Education Canada 6-16 Recent Changes From pay as you go This year’s contributors pay for this year’s pensions To steady-state funding Rapidly increasing rates Build up a large fund Investment in the market

Copyright © 2008 Pearson Education Canada 6-17 The Old Age Security System

Copyright © 2008 Pearson Education Canada 6-18 Overview of OAS System Operated/funded by the federal government Recipients do not contribute Basic, guaranteed retirement income Includes three public pension benefits 1. Old age security (OAS) 2. Guaranteed income supplement (GIS) 3. Spouses allowance (SPA)

Copyright © 2008 Pearson Education Canada Old Age Security (OAS) Pension Introduced 1952 Applies universally to all Canadians Even if pensioner leaves Canada permanently As of July 1, 1997 Full pension after 40 years of residency after age 18 Maximum benefit January - March $ per month Indexed quarterly to CPI Taxable income

Copyright © 2008 Pearson Education Canada 6-20 Clawback of OAS Pension Repayment of OAS benefits Special 15% tax introduced in 1989 If net income higher than threshold $63,511 in 2007 Indexed annually to the extent CPI exceed 3% annually OAS benefits reduced to zero With $102,865 of net income

Copyright © 2008 Pearson Education Canada Guaranteed Income Supplement (GIS) Introduced 1992 Paid to low-income pensioners In addition to OAS benefits Must pass the net income test Must be applied for each year Indexed quarterly to CPI Not considered taxable income Must be reported as part of total income but subsequently deducted

Copyright © 2008 Pearson Education Canada 6-22 GIS Benefits January 1, 2007 Single individual Or person whose spouse/common law partner is not receiving OAS or SPA Maximum benefit $ Spouse/common law partner of pensioner Maximum benefit $ Benefits cease Absent from Canada for more than six months

Copyright © 2008 Pearson Education Canada 6-23 GIS clawback of Benefits 50% clawback Benefit reduced by $1 for every $2 of previous year’s net income At net income of $14, Maximum single benefit entirely clawed back

Copyright © 2008 Pearson Education Canada Spouses Allowance (SPA) Benefits to spouses who are/were married to GIS recipients Pensioner’s spouse, common law partner, widow, widower Spouse must be aged 60 to 64 Allowance terminated at age 65 Or if recipient dies or remarries Spouse must pass the net income test

Copyright © 2008 Pearson Education Canada 6-25 SPA Benefits Benefit $ per month January 2007 Equivalent to maximum OAS benefit plus maximum GIS benefit Not considered taxable income Must be reported as part of total income but subsequently deducted

Copyright © 2008 Pearson Education Canada 6-26 SPA clawback of Benefits 75% clawback SPA benefits reduced $3 for every $4 of couple’s combined income from other sources

Copyright © 2008 Pearson Education Canada 6-27 Tax Assistance for Retirement Planning

Copyright © 2008 Pearson Education Canada 6-28 Tax Advantageous Vehicles Sanctioned by the income tax act Encourage employees/employers to save To provide a retirement income Contributions and accumulating interest Exempt from taxation until withdrawn as income

Copyright © 2008 Pearson Education Canada 6-29 Types of Tax Advantageous Vehicles Registered pension plans, RPP’s Employee contributions first became tax deductible in 1919 Registered retirement savings plans, RRSP’s First available in 1957 Deferred profit sharing plans, DPSP’s To which employers could make contributions on behalf of employees on a tax deferred basis

Copyright © 2008 Pearson Education Canada 6-30 Registered Pension Plans

Copyright © 2008 Pearson Education Canada 6-31 Two Types of RPP’s Defined-benefit pension plans Defined-contribution pension plans

Copyright © 2008 Pearson Education Canada 6-32 Defined-benefit Plans Generally contributory plans Contributions by employer and employee Limited contributions per year Amount to fund a maximum benefit of $2,222 per year of service Past service contributions permitted

Copyright © 2008 Pearson Education Canada 6-33 Defined-benefit Plans Specified annual pension at retirement Value of benefits related to years of service and earning levels Maximum benefit of $2,222 per year of service Employer has pension liability to fund To ensure that the future pensions are adequately secured

Copyright © 2008 Pearson Education Canada Basic Forms of Defined- benefit Pension Plans 1. Career-average pension plans 2. Final and best earnings pension plans 3. Flat-benefit pension plans

Copyright © 2008 Pearson Education Canada Career-average Pension Plans Benefits related to career average earnings and years of credited service

Copyright © 2008 Pearson Education Canada Final and Best-earnings Pension Plans Final-earnings pension plans Benefits related to earnings in final three to five years of credited service Best-earnings pension plans Benefits related to average of the best three to five years of credited service

Copyright © 2008 Pearson Education Canada Flat-benefit Pension Plans Retiring members receive a flat rate benefit regardless of earnings

Copyright © 2008 Pearson Education Canada 6-38 Defined-contribution Plans Specified contributions By employer and employee Past service contributions not permitted Unspecified amount of pension Employer doesn’t promise specific pension amount Less obligation on the part of the employer No pension liability on part of employer

Copyright © 2008 Pearson Education Canada 6-39 Maximum Contributions for Defined-contribution Plans Combined contributions must not exceed the money purchase limit Limit is the lesser of 18% of earned income of preceding year $20,000 in 2007