As a forward-thinking employer, you understand the significance of helping your employees alleviate financial stress through education and support.
In this blog post, we introduce the two fundamental retirement benefits offered by the Federal government and explain how the deductions from your employees' paycheques will ultimately benefit them.
The Old Age Security (OAS) is a benefit provided by the federal government of Canada for individuals over the age of 65 who have lived in the country for at least 10 years.
The amount of monthly income you will receive from the Old Age Security (OAS) program depends on when you start receiving the payments. If you begin receiving OAS payments at 65 years old, you can receive up to CAD 685.50 per month (Q1 2023). However, if you wait until you are 70 years old to start receiving payments, you can receive up to CAD 932.28 per month (Q1 2023). For every month past age 65 that you wait before applying for OAS benefits, your monthly payment will increase by 0.06%, which translates to an increase of 7.2% per year, up to a maximum of 36% at age 70. It's worth noting that OAS payments are indexed quarterly to adjust for inflation.
Additionally, starting in 2022, pensioners over the age of 75 will receive an additional monthly amount on top of their regular OAS payment.
For more information about OAS, please visit this link.
The Canadian Pension Plan (CPP) is a government-administered retirement benefit program designed for working Canadians who have made regular contributions over the years. In Quebec, workers have access to a similar program called the Quebec Pension Plan (QPP).
All working Canadians between the ages of 18 and 70 are required to make CPP contributions, and both employees and employers contribute equally to earnings. In 2023, the contribution rate for both employees and their employer has increased to 5.95% of a worker’s income up to an annual maximum of CAD 3,754.45.
The CPP is available to everyone who has made valid contributions, regardless of the number of years they have worked. To qualify to receive CPP retirement benefits, you must be at least 60 years old.
Your CPP pension amount is determined by several factors, including your age when you start receiving your pension, your contributions, and your average annual earnings. The pension amount is calculated based on your best 40 years of earnings, with up to eight low or no salary years excluded.
As of 2023, the maximum monthly amount for a new recipient starting their pension at age 65 is CAD 1,306.57. However, the average monthly amount paid for a new retirement pension (at age 65) in October 2022 was only CAD 717.15. This variation is due to a host of factors but generally relates to the length of time in the workforce and earnings history.
CPP benefit calculations are based on starting benefits at age 65. If a person begins receiving benefits before age 65 (earliest age 60), they give up 0.06% for every month prior to age 65, which results in a loss of 7.2% per year or a total of 36% at age 60. Conversely, for every month a person can wait to take their pension after age 65, the monthly amount increases by 0.07% or 8.4% per year, resulting in a total increase of 42% at age 70. It is also important to note that as with OAS, CPP is indexed against inflation.
For more information about CPP, visit this link.
Yes, both OAS and CPP are considered taxable income. Seniors can however reduce their tax burden through deductions and tax credits.
The Canadian Pension Plan (CPP) and Old Age Security (OAS) are fundamental to retirement income and are designed to provide basic security for your old age. Mandatory deductions from your paycheque ensure that you contribute to CPP directly throughout your working life. However, relying solely on these government benefits may not be enough to maintain your standard of living during retirement.
Planning for retirement is a critical part of financial planning. While government retirement benefits, like OAS and CPP, can provide a basic level of income in retirement, there are several other sources of retirement income to consider.
For example, your employer may offer a retirement plan such as a group Registered Retirement Savings Plan (RRSP) or a registered pension plan (RPP). Under these plans, you and your employer regularly contribute money to the plan, helping to secure your retirement.
Additionally, a Tax-Free Savings Account (TFSA) can hold a variety of investment products and allows your savings to grow tax-free, providing another potential source of retirement income.
When planning for retirement, it's essential to understand how to convert your savings and investments into retirement income. This may involve converting an RRSP into a Registered Retirement Income Fund (RRIF), buying an annuity, investing in other products like stocks or bonds, or withdrawing your savings as cash.
It's also important to be aware of the maximum annual taxable income one can receive before triggering the OAS clawback, which is currently set at CAD 86,912 (2023).
If you own your home, you may also be able to use the equity you've built up in it to provide additional income in retirement.
By carefully examining all the ways to generate income in retirement and planning ahead, you can ensure that you have sufficient funds to enjoy your retirement.
While the government provides some support to prevent Canadians from falling into absolute poverty during their golden years, it is important to start planning for retirement as early as possible to ensure financial security in old age.
Seeking professional help for this life-changing decision can help you make the most of your current situation and avoid mistakes that may lead to financial difficulties in the future.
Did you enjoy reading our content? Gain even deeper insights by joining our upcoming webinar "Addressing Potential Liabilities in Benefits Plans."