Now that we’ve looked at the three major sources of retirement income furnished by the Canadian government, it’s time to tackle the morbid topic of survivor benefits. It’s rare that a couple dies at the same time. Usually one spouse is left to deal with grief compounded by the complications of claiming benefits from the government. Statistically, women tend to more often be the survivors.
Let’s start with employer pensions. As MoneySense.ca wrote some years back, pension law requires that you and your spouse be offered a joint-and-survivor pension that makes payouts until both partners die. While pension administrators will likely encourage the pensioner to provide for the spouse, some may offer a spouse the option to waive their pension rights.
Depending on the paperwork signed when you elected to start receiving a corporate pension, your spouse may be entitled to a good percentage of what the lead pensioner is promised: it can range from 50% to two thirds to 75% and may even be 100%.
There is a price to pay for the higher percentages, which generally comes in the form of reduced benefits for the retiree while he (we’ll assume a He) is still alive. In other words, the joint pension that provides continued benefits once the primary retiree has passed away will be lower than for a single pension that specifies no survivor.
Retired actuary and pension expert Malcolm Hamilton says most Defined Benefit pensions are in the public sector and have automatic survivor provisions with no reduction in the member’s pension. For a couple both in such pensions, the survivor will continue to get their own full pension and usually 60% of the spouse’s, meaning a relatively modest 20% drop in the family pension income.
Unfortunately, survivor benefits for government programs like CPP and OAS aren’t comparable. There is a CPP survivor’s pension paid to the person who, at the time of death, is the legal spouse or common-law partner of the deceased contributor. A survivor who is 65 or older and not already receiving CPP benefits qualifies for a survivor benefit of 60% of the deceased spouse’s CPP pension, assuming benefits beginning at 65.
But if each spouse was getting maximum CPP then when the first spouse dies, the survivor won’t get as much as they may have hoped. It all depends on age and past contributions.
In an email, Service Canada said that in 2017, the maximum survivor’s pension that can be received by beneficiaries over age 65 is $658.50 per month, although the average pension received by new beneficiaries in this age range was just $315.77 as of March 2017.
The rules for combining a CPP survivor pension with regular CPP benefits are tricky. Service Canada says the survivor and retirement pensions are “combined into a single benefit” that cannot exceed $1,114.17 in 2017. As this article in the Globe & Mail explains, “if both partners were getting the maximum CPP retirement pension, there will be no survivor benefits when one dies. None … the survivor is allowed to get the equivalent of only one maximum CPP retirement benefit.”
Doug Runchey, of B.C.-based DR Pensions Consulting, confirms “they won’t get any survivor benefit if they’re at a maximum; if they’re under the maximum there’s a complicated reduction.”
The rules are even more complex before age 65. Between 45 and 65, the survivor gets 37.5% of the contributor’s CPP pension, plus a flat rate benefit of $186.51 monthly. Under 45, full survivor benefits are paid only if the survivor is disabled or raising a dependent child. If not, the survivor benefit is reduced by one 120th for every month the survivor is under 45, at which point it becomes zero if they’re under 35 and aren’t disabled or have a dependent child, Runchey says. This site notes that if you are widowed more than once, only one survivor’s pension —the larger — will be paid.
Another shock for a recently bereaved spouse is that the survivor also loses the deceased spouse’s Old Age Security benefits. Worse, he or she may now be subject to clawbacks of their own OAS benefits, assuming the resulting combined RRSP/RRIF puts them at or beyond the clawback threshold.
After 65, there is no OAS Survivor’s Benefit: Don’t be misled by the term Allowance for the Survivor, which applies only to those aged 60 to 64 and is subject to various other stipulations: notably that you have a partner or common-law spouse who has died. Service Canada says the Allowance for the Survivor is an “income-tested transitional benefit” and that once these beneficiaries reach age 65, their benefit is converted to an OAS pension and “possibly the Guaranteed Income Supplement.”
However, the Allowance is “far removed” from a true Survivor’s Benefit, says Runchey, who spent more than 30 years working with these programs for the government, “I’d say OAS and GIS have no true Survivor’s Benefit to them.” If you lose a spouse at 25 the Allowance for the Survivor won’t kick in until 60, and then only if income is low enough, they’re not remarried or living common law.
According to Service Canada’s site here, the Allowance for the Survivor in this situation was a maximum monthly benefit of $1,321.46 as of July to September 2017. Writing at RetireHappy.ca, Runchey said “there is no valid policy rationale for the Allowance for the Survivor and it is a good example of how some well-intentioned government programs evolve into something else.”
OAS is unlike a workplace pension, Hamilton says. “The idea behind OAS was to give almost everyone over 65 a small pension no matter how much they worked or how little they earned before 65.” For most Canadians (excluding those with low incomes and those with high incomes, whose OAS benefits are clawed back), “there is no OAS survivor pension because 50% of the couple’s OAS pension is already paid to the surviving spouse and will continue for as long as he or she lives.”
At some point, Ottawa realized a 50% reduction in a family’s OAS income upon the first death is problematic because the surviving spouse needs more than 50% of the couple’s income to maintain his or her standard of living. It also realized that if the older spouse supports the couple and retires at 65, the couple won’t collect two OAS benefits until the younger spouse turns 65 and this may make it difficult for them to retire.
Enter the GIS, but again only for the lowest-income seniors. Ottawa solved the problem only for low-income couples by creating the Spousal Allowance (for low-income couples where the younger spouse is between 60 and 64) and by making the GIS benefit for single seniors much larger than 50% of the GIS benefit for a couple.
When a couple each with OAS suffered the death of one partner, the GIS made up in part for the loss of the second OAS benefit. For a couple with no other income, when one spouse dies the GIS benefit doesn’t drop in half, although it may drop by roughly a quarter. “The GIS that one spouse gets is not the same as the GIS the two spouses got before but it’s a lot more than half,” Hamilton said in an interview.
Runchey says it doesn’t drop by any specified percentage; it just changes a single GIS benefit, which can be an increase or a decrease. So if a married couple are both pensioners living on $20,000 from one partner, if that partner dies the survivor will see an increase in GIS. If on the other hand the low-income partner dies, the survivor’s GIS would drop to zero because their income exceeds the allowance for a single pensioner, Runchey says. “Again, it’s not a Survivor’s Benefit but an acknowledgement you’re being paid now as a single person.” That can result in more or less GIS, depending on the situation.
Moving on to private savings, including RRSPs and RRIFs, the rules are simpler than the preceding. Ideally you and your spouse have named each other the beneficiary on your RRSPs and eventually RRIFs. If so, the rules are relatively simple: the money in the one spouse’s plan rolls over tax-free to the survivor. It’s only when the second spouse dies that there will be a large tax liability to the government.
Tax-free Savings Accounts (TFSAs), introduced in 2009, have a special wrinkle and here we will refer you to a past Retired Money column. The main thing is to ensure you and your partner do the paperwork and name each other a Successor Holder for your respective TFSAs.
MORE FROM A RETIREMENT EXPERT:
- Should I add to an RRSP in retirement?
- Should you do a pension buyback?
- The retirement reshuffle
- CPP and OAS after the death of a spouse
- Reasons to tap RRSPs before age 71
- Collecting CPP while working in the U.S.
- Lump sum vs. monthly pensions
- Retiring to Mexico— for a lower tax rate