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Q. I just got laid off because of restructuring, but I got a package from work that will have me getting paid until February 2021. I am 65 as of March 2020. I did not apply for my pensions yet. If I apply now will it be deducted from my unemployment in February? Should I wait to apply for a pension?
A. I am sorry to hear about your layoff, Nancy. Hopefully you were close to retiring. I know sometimes these packages are welcomed for those approaching retirement. But even if that’s the case, it can still be difficult for those not yet prepared to be retired.
It sounds like you are receiving salary continuance through to next February, with regular payroll deposits continuing until that time. Even if you received a lump-sum severance payment all at once, if it would otherwise replace your salary until February, you would not be able to apply for employment insurance (EI) until that time.
EI benefits are available to workers who lose their job through no fault of their own, including a layoff. In your case, Nancy, you must be available for and able to work when you apply, and actively looking for, but unable to find a job. As such, EI benefits are not an automatic entitlement when you lose your job.
If you are looking for a job in February, and cannot secure employment, you can likely apply for and receive EI benefits. In 2020, the weekly maximum benefit is $573 if you had enough insurable hours of employment prior to applying, which will likely be the case if you were working full-time prior to your termination. EI benefits are adjusted annually for inflation based on the yearly maximum insurable earnings limit.
Whether you should apply for a pension depends on a few things
I assume the pensions you are referring to in your question, Nancy, are the Canada Pension Plan (CPP) and Old Age Security (OAS). You can apply for a CPP retirement pension between age 60 and 70, and for OAS between age 65 and 70. Now that you are 65, you can apply for either or both pensions.
The longer you wait to apply for these pensions, the higher the payments you will receive. This is because these pensions are reduced if you take them earlier and enhanced if you take them later.
There are a few considerations in thinking about when you should apply for a pension.
If your net income on line 23600 of your tax return exceeds $79,054 for 2020, your OAS pension will be subject to a clawback or pension recovery tax of 15% for every incremental dollar of income. This, in addition to regular income tax, could result in a marginal tax rate of 43% to 53% tax on your OAS pension.
So, if your income is high for 2020 and is expected to be lower in 2021, you may want to delay applying for your OAS pension. As mentioned, it will increase while you wait, by 0.6% per month of deferral plus a quarterly inflation adjustment.
If you are already entitled to the maximum CPP retirement pension, based on your contribution history, you may want to consider applying for the CPP. The reason is: Your salary continuance will continue to have CPP contributions deducted from it, but you will not receive any additional pension entitlement for making those contributions.
However, if you begin your CPP retirement pension, your additional contributions will result in a post-retirement benefit (PRB), and that will increase your pension in subsequent years. You can confirm your CPP entitlement by contacting Service Canada.
Starting your OAS and CPP needs to be weighed with other considerations, like whether you need additional cash flow, or how much lower your income and resulting tax rate will be in 2021 and future years.
What about EI and your termination package?
Furthermore, pension income from employment is considered earnings for EI benefit purposes and may reduce your EI entitlement. Employer defined benefit (DB) or defined contribution (DC) pensions and CPP retirement pensions will reduce EI regular benefits payable if they exceed an earnings threshold of 90% of the weekly insurable earnings used to calculate your EI benefit.
OAS is an age-based pension, not tied to employment. So, receiving your OAS pension will not impact your EI entitlement. Registered Retirement Savings Plan (RRSP) or Registered Retirement Income Fund (RRIF) withdrawals, although they originated from employment earnings and contributions, are not considered “earnings” against EI. Other income sources or investment account withdrawals like from a Tax-Free Savings Account (TFSA) or non-registered investment account are not considered earnings for EI purposes either.
Retirement, pensions and taxes
All that said, when you file your 2021 tax return, if your net income on line 23400 exceeds a certain threshold – $67,750 for 2020 and likely to be adjusted for inflation for 2021 – you may also be subject to a reduction in your EI. An EI recipient may have to repay 30% of their income in excess of the threshold up to a maximum of 100% of their benefits paid.
In summary, there are income tax, pension enhancement, and benefit entitlement considerations to consider before you decide to apply for a pension. Other important factors for you are determining if you need to look for a new job and continue to work in order to ensure your money outlasts you in retirement. If you are financially able to retire, determining the right pension and asset drawdown strategy can minimize your lifetime tax, maximize your retirement spending, and result in a larger estate for your beneficiaries.
Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto. He does not sell any financial products whatsoever.
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