Q: I am still working at age 63 and getting CPP. I will have a pension when I retire and I have an RRSP.
When I retire at age 70, I believe I will have to start withdraw from my RRSP.
Because I already have a pension, will my monthly CPP payout be reduced?
A: I find that a lot of Canadians are confused when it comes to their retirement income, Gisele. So you are definitely not alone. I’m going to try to clarify your concerns.
First, I’ll comment on receiving the Canada Pension Plan (CPP) before you retire, as this is an area that most people don’t understand. If you start your CPP retirement pension between age 60 and 65–as you did–you have to continue to contribute to the CPP while you are working. If you are between age 65 and 70, you have the option to opt out of contributing or you can continue to contribute. Contributions made after you begin your CPP will enhance your monthly pension through the Post-Retirement Benefit (PRB).
Continuing to contribute may provide a good “return on investment” in particular for conservative investors, those who expect a long life expectancy or married Canadians whose spouse is younger or who won’t receive the full CPP retirement pension themselves.
You asked about Registered Retirement Savings Plan (RRSP) withdrawals and to clarify, you don’t have to start taking withdrawals simply because you retire, Gisele. You may have no choice if you need the money, but RRSP withdrawals can happen as early as you want or as late as the year after you turn 71.
By the end of the year you turn 71, you need to either convert your RRSP to a Registered Retirement Income Fund (RRIF) or purchase an annuity (a monthly payment from an insurance company in exchange for your RRSP savings). Payments must then start by the year you turn 72 at the latest. Most people convert their RRSP to a RRIF and then start to take at least the minimum required withdrawal mandated by the federal government (based on your age) or more if needed for cash flow.
CPP is not reduced because you have RRSP or pension income. CPP is what it is based on your entitlement from your historical contributions. I suppose you could say that it is indirectly reduced by income tax payable on your pension, so planning when to take CPP, RRSP/RRIF withdrawals and company pensions should be considered so you can pay the least tax possible. Nonetheless, Gisele, your gross, pre-tax CPP pension is predetermined and not impacted by other income sources thereafter.
On the other hand, the Old Age Security (OAS) pension may be reduced based on other sources of income. If your net income on line 236 of your 2015 income tax return exceeds $72,809, your OAS pension will be reduced by 15 cents on every excess dollar for the July 2016 through June 2017 payment period.
A common area of confusion with pensions is how CPP integrates with a company pension, Gisele. It’s important to understand that when you take your company pension has no impact on your CPP entitlement. And when you take your CPP has no impact on your company pension entitlement.
Pension plans may take into account a notional integration of the CPP if you retire before age 65. Some pensions calculate your monthly pension payment so that you get a higher pension until age 65 and then a lower pension after age 65. The higher payment before age 65 is based on the assumption that age 65 is the typical CPP/OAS date and that pensioners may need more pension income before age 65 and less afterwards. But your pension plan and CPP don’t talk to each other and modify your payments – they are independent.
Hopefully this provides some clarity for you, Giselle. It’s important to understand your various sources of retirement income, the way they work, how they are taxed, how much you need and so on. A lot of people are ostriches when it comes to retirement planning, but whether we like it or not, retirement will eventually be upon us all.
Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto, Ontario. He does not sell any financial products whatsoever.