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Copyright © 2008 Pearson Education Canada6-1
Chapter 6
Retirement Income
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Sources of Retirement Income Public pensions Private pensions Investment income
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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
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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
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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
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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 rates1996 2.8%2000 3.9%2001 4.3%2002 4.7%2003 4.95%2004 4.95%2005 4.95%2006 4.95%2007 4.95%
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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
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Maximum Contribution, 2007 $1,989.90
90.989,1$
200,400495.
500,3700,430495.
exemption basic-earnings epensionabl maximumrateon contributi
earningsry contributo maximumrateon contributi
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Monthly Retirement Pension With Retirement at Age 65 Related to past contributions
Made on pensionable employment earnings
Maximum benefit $863.75 in 2007 25% of YMPE of last 5 years
All benefits are taxable income
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Monthly Retirement Pension With Retirement at Age 60-65 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%
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Monthly Retirement Pension With Retirement Age 66-70 Do not need to cease employment Pension increased by 0.5%
For every month the start date exceeds the 65th birthday
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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
$482.30 per month Maximum over age 65
$518.25 per month
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Survivor Benefits, 2007 Orphan’s benefit
Up to age 18 25 if in approved educational institution
$204.68 per month
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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 $1053.77 Greater than the retirement benefit
Pension for children of disabled contributor Maximum benefit $204.68
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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
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The Old Age Security System
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Overview of OAS System Operated/funded by the federal
government Recipients do not contribute
Basic, guaranteed retirement income Includes three public pension
benefits1. Old age security (OAS)2. Guaranteed income supplement (GIS)3. Spouses allowance (SPA)
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1. 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 2007 - $491.93 per month Indexed quarterly to CPI Taxable income
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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
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2. 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
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GIS Benefits January 1, 2007 Single individual
Or person whose spouse/common law partner is not receiving OAS or SPA
Maximum benefit $620.91
Spouse/common law partner of pensioner Maximum benefit $410.04
Benefits cease Absent from Canada for more than six months
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GIS clawback of Benefits 50% clawback
Benefit reduced by $1 for every $2 of previous year’s net income
At net income of $14,901.84 Maximum single benefit entirely
clawed back
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2. 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
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SPA Benefits Benefit $901.97 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
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SPA clawback of Benefits 75% clawback
SPA benefits reduced $3 for every $4 of couple’s combined
income from other sources
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Tax Assistance for Retirement Planning
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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
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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
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Registered Pension Plans
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Two Types of RPP’s Defined-benefit pension plans Defined-contribution pension
plans
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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
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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
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3 Basic Forms of Defined-benefit Pension Plans
1. Career-average pension plans2. Final and best earnings pension
plans3. Flat-benefit pension plans
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1. Career-average Pension Plans
Benefits related to career average earnings and years of credited service
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2. 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
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3. Flat-benefit Pension Plans Retiring members receive a flat
rate benefit regardless of earnings
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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
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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