A) The Canadian Pension System
The Canadian Pension System has a fine reputation. Some of the best performing Pension Funds are Canadian.
Like many other western countries, Canada has a three pillar pension system:
- Pillar 1: Governmental Pensions;
- Pillar 2: Workplace Pensions;
- Pillar 3: Private Pensions & Assets.
B) Canadian State Pension
Canada is home to some of the world’s most admired and successful public pension organizations. This was not always the case.
As recently as the mid 1980s, many Canadian public pensions were invested largely or entirely in domestic government bonds, were funded primarily on a pay-as-you go basis, lacked independent governance, and were administered in an outdated and error prone fashion.
Over the past three decades, a “Canadian model” of public pension has emerged that combines independent governance, professional in-house investment management, scale, and extensive geographic and asset-class diversification.
The Canada Pension Plan (CPP) retirement pension is a monthly, taxable benefit that replaces part of your income when you retire. If you qualify, you’ll receive the CPP retirement pension for the rest of your life.
To qualify you have to:
- Be at least 60 years old;
- Have made at least one valid contribution to the CPP.
Valid contributions can be either from work you did in Canada. Or as the result of receiving credits from a former spouse or former common law partner at the end of the relationship.
CPP payments are not automatic. You have to apply. You should apply in advance of when you would like your pension to start. It is their goal to pay your CPP retirement pension in the month of the start date you choose.
4. Contribution Rates and Maximums
The Canada Revenue Agency has published CPP contribution rates and maximums for 2020:
- The pensionable earnings maximum is increased to CAD 58,700, while the basic exemption amount remains CAD 3,500, resulting in maximum contributory earnings of CAD 55,200;
- The employee and employer contribution rates are increased from 5.10% to 5.25% (10.50% for self-employed);
- The maximum annual employee and employer contributions are increased to CAD 2,898.00 and the maximum annual self employed contribution is increased to CAD 5,796.00.
5. Pension Amounts
The amount you receive each month is based on:
- Your average earnings throughout your working life;
- Your contributions to the CPP;
- The age you decide to start your CPP retirement pension.
Your contributions to the CPP are based on your earnings. Everyone is entitled to CPP regardless of how many years they have worked. Thus there is no required minimum period.
The standard age to start the pension is 65. However, you can start receiving it as early as age 60 or as late as age 70.
If you start receiving your pension earlier/later, the monthly amount you’ll receive will be smaller/larger. There’s no benefit to wait after age 70 to start receiving the pension. The maximum monthly amount you can receive is reached when you turn age 70.
For 2020, the maximum monthly amount you could receive as a new recipient starting the pension at age 65 is CAD 1,154.58. The average monthly amount is CAD 679.16. Your situation will determine how much you’ll receive up to the maximum.
6. Additional Benefits
In addition to the CPP retirement pension, you may also quality for other CPP benefits listed below.
Like the CPP retirement pension, you need to apply for these benefits (except for the Post-retirement benefit if you already receive the CPP retirement pension):
- Post-retirement benefit;
- Disability pension;
- Post-retirement disability benefit;
- Survivor's pension;
- Children's benefit;
- Death benefit.
7. CPP Enhancement
Starting in 2019, the CPP will gradually increase due to the CPP enhancement.
The enhancement works as a top-up to the base, or original CPP, and will mean higher benefits in retirement in exchange for making higher CPP contributions.
The CPP enhancement will only affect you if you work and make contributions to the CPP as of January 1, 2019.
The CPP enhancement will increase the:
- CPP retirement pension;
- Post-retirement benefit;
- Disability pension;
- Survivor’s pension you could receive.
There’s no change to qualifying for CPP benefits.
C) Canadian Occupational Pension
In addition to the Canada Pension Plan, some Canadians have an employer-sponsored pension plan as part of the package as offered by the company.
These plans can be a great help in saving for retirement:
- They help you save money regularly from your pay;
- Your employer contributes all or some of the money into your plan;
- You won't have to pay taxes on the money your investments make in these plans until you retire and use the money.
If your employer offers a pension or retirement savings plan, look into joining. It can be a fine way to get started on saving for retirement.
1. Nature Of Plans
Pension plans are generally one of two types:
- Defined Contribution (DC) plan;
- Defined Benefit (DB) plan.
2. Defined Contribution Pensions
A Defined Contribution (DC) pension plan establishes a set amount that you and your company will contribute to your plan each year. The amount is based on how much you make.
Defined contribution plans don't guarantee what you will get when you retire; that depends on how well the plan is managed. You can work with a financial professional or a pension advisor to determine how much you will likely receive each year.
Defined contribution plans require that you collapse the plan by the end of the year you turn 71. At that point, you can withdraw the funds and pay tax on the income, transfer the assets to a registered retirement income fund (RRIF) or purchase an annuity.
3. Defined Benefit Pensions
A Defined Benefit (DB) pension plan promises to pay you a set income when you retire. A formula determines how much you will get. It is often based on your income when you were working and the number of years you have worked.
D) Canadian Oversight Pension System
The Canadian Association of Pension Supervisory Authorities (CAPSA) is one of the three members of the Joint Forum of Financial Market Regulators.
The other Joint Forum members are the Canadian Council of Insurance Regulators (CCIR) and the Canadian Securities Administrators (CSA). It also includes representation from the Canadian Insurance Services Regulatory Organizations (CISRO).
CAPSA is a national association of pension regulators whose mission is to facilitate an efficient and effective pension regulatory system in Canada. It develops practical solutions to further the coordination and harmonization of pension regulation across Canada.
CAPSA provides a forum where pension regulators across Canada share information on regulatory issues in their jurisdiction, and where possible, collaborate in developing solutions to address them.
Every three years, CAPSA develops a number of strategic priorities that provide a framework for its initiatives. CAPSA develops regulatory policies and guidelines to improve pension plan administration and support pension plan administrators in meeting their fiduciary duty, while enhancing the protection provided to pension plan members across Canada.
CAPSA’s Strategic Plan includes reviews of its existing guidelines as they relate to funding policies and aims to develop new guidance on Environmental, Social and Governance factors in pension investments.
The revised Defined Contribution Pension Plans Guideline and the Electronic Communication in the Pension Industry Guideline, along with a new Guideline on Searching for Un-locatable Members of a Pension Plan demonstrate CAPSA’s role in developing guidelines to improve pension plan administration and enhance protection for pension plan beneficiaries.
CAPSA established the National Pension Compliance Officers Association (NPCOA). The goal of the NPCOA is to harmonize administrative policies and processes related to the registration and monitoring of pension plans in all jurisdictions.
NPCOA acts as a forum where pension regulatory staff focus on the harmonization of administrative procedures and discuss issues relevant to the pension plan regulatory process. NPCOA facilitates technical training on common issues for front-line staff by acting as a learning resource and providing training on CAPSA initiatives, best practices and other pension related topics.
Each year, NPCOA will develop a ‘Goal’ document to identify its short and long-range objectives and initiatives.
E) Canadian Personal Pensions
1. RRSP: For Extra Tax Benefits
A Registered Retirement Savings Plan (RRSP) allows savings for retirement to grow tax free in a special plan registered with the Canadian government.
RRSP’s are a key part of retirement planning due to the tax advantages they offer. But you need to know the rules to get the most mileage out of RRSP’s and avoid tax penalties.
The total amount you can contribute to your RRSP each year is made up of your contribution limit for the current year plus any "carry-forward" contribution room from previous years.
Your RRSP contribution limit for 2019 is 18% of earned income you reported on your tax return in the previous year, up to a maximum of CAD 26,500. For 2020, the dollar limit is CAD 27,230. If you have a company pension plan, your RRSP contribution limit is reduced.
If you don't make the maximum allowable RRSP contribution in any given year, Canada Revenue Agency (CRA) lets you carry forward the unused contribution room indefinitely and add this to the amount you can contribute for future years.
Both your annual contribution limit and any carry-forward contribution room are shown on your notice of assessment.
Do you have an employer-sponsored pension plan? If so, your RRSP contribution limit is reduced by the pension adjustment. The pension adjustment is calculated by your employer and reported to the CRA on your T4 each year.
If you're a member of a Defined Contribution registered pension plan (RPP) or defined profit sharing plan (DPSP), your pension adjustment is the total contributions to the plan made by you and your employer.
If your RPP is Defined Benefit, your pension adjustment is determined by a formula designed to reflect the pension benefit entitlement you earned in the year.
2. IPP: For Extra Tax Benefits
If you’ve reached your RRSP contribution limit and you fit all criteria, an Individual Pension Plan (IPP) is another way to save for retirement with tax benefits.
If you are a business owner or executive looking for an alternative to your RRSP to save for your retirement while saving on your tax bill, then an IPP may be interesting.
An IPP is a registered Defined Benefit (DB) pension plan for just one member. It can let you build your retirement income under a tax-sheltering umbrella and get the maximum pension that Canadian tax law allows.
If you’re a business owner or an executive, an IPP can create additional contribution room over and above an RRSP once you reach a certain age.
If you own your business, an IPP can save even more tax, because the IPP contributions your business makes, plus any administrative costs, are tax-deductible.
To start an IPP and become a plan sponsor, your company needs to be incorporated. To be an IPP plan member, you need to be an employee or a shareholder of the sponsoring company and earn “T4 income”. (Wages that’s reported on your annual T4 statement.)
An IPP can create a significant tax-planning opportunity for you and your business, both when you first start funding the plan and when you retire, through tax deductible lump-sum contributions known as “past-service funding” and “terminal funding,”.
In the first year of your plan, depending on your specific circumstances, your business may be able to contribute a large tax deductible lump sum to account for net “past services” that have accumulated with your business.
This means that an IPP can still be a powerful solution up to age 71 as the history of your T4 income with your sponsoring company affects the assessed value of your initial contributions. When you’re approaching retirement, depending on your situation, you may be able to top up your IPP through terminal funding.
These options let you use creative tax planning to enhance your retirement. Please take into account that RRSP planning is limited once an IPP is established. Contributions to an IPP will create a pension adjustment that will decrease (and likely eliminate) new RRSP contribution room. Also note that you need to make a non-taxable transfer from your RRSP account for a portion of the past-service funding.
Who is an IPP for?
To find out whether an IPP would be right for you and then to set one up, you’ll need to work with your financial advisor.
An IPP could be interesting if:
- You’re 45 or older;
- You don’t belong to another pension plan;
- You’ve been with your employer or owned your business for 10 or more years;
- The earnings on your T4 are CAD 75,000 or more.
What happens to your IPP once you retire?
When you retire or leave your employer, you have several options:
- Receive a monthly pension from the plan;
- Buy an annuity from a life insurance company;
- Transfer the value to a life income fund (LIF) or locked-in retirement income fund (LRIF).
The rules for IPP’s are similar to those for RRSPs. You have to start receiving income from your IPP by the end of the year you turn 71. When you die, any remaining value goes to your surviving spouse or to your estate. You could also wind up your plan early and take out the cash value but please seek tax advice upon deciding which route to take.
Finally deciding whether an IPP is right for you and ultimately setting one up requires advice.
F) News September 2020
Pension Plan Funding Priority
Plan sponsors in Canada are finding it increasingly difficult to fund defined benefit (DB) pension plans, which rely on employer contributions to provide promised benefits to participants. As the population ages and investment performance slips, additional contributions are needed to adequately fund DB plans, but economic volatility makes finding the extra cash problematic.
As DB plans struggle, attention has shifted to capital accumulation plans. Both sponsors and participants contribute money to capital accumulation plans, which is often then left to the mercy of the markets. Some wonder whether capital accumulation plans will provide adequate retirement income—will participants have enough money to last the rest of their lives?
Federal, provincial and local governments are legislating temporary and permanent funding/solvency relief for DB plans. Governments and industry experts are also analyzing the possibilities of retirement income security for their aging populations.
Are lifetime income distribution options plausible? Should retirement saving be mandatory? Are participants receiving the information and education they need to plan for retirement and make wise investment decisions? These are just some of the issues to watch in the continuing debate.