What you need to know about the retirement income system in Ontario, including how it works, challenges for the future and what you can do to help maintain your standard of living in retirement.
Understanding the retirement income system
Evidence shows that many Ontarians are not saving enough to maintain their standard of living in retirement. Beyond the statistics, many feel insecure and uncertain about their financial future.
It’s important to learn how the retirement income system works, so that you and your family can have the retirement security you deserve.
The Canadian retirement income system is typically described as having three parts:
- Old Age Security (OAS) and the Guaranteed Income Supplement (GIS). OAS provides a monthly benefit to almost all Canadians when they reach age 65. GIS provides supplemental income to Canadians who have low retirement incomes.
- Canada Pension Plan (CPP) provides a monthly benefit to people who have contributed to this publicly-administered plan over the course of their working lives.
- Personal Savings and Workplace Pension Plans. Workplace pension plans are privately administered by employers who choose to offer them. Personal savings can include Registered Retirement Savings Plans (RRSPs), savings accounts, investments and home equity.
These combine to fund your retirement, but the importance of each one may differ depending on your personal circumstances.
How much you should save
Retirement experts suggest that households should aim to have 50-70% of their pre-retirement income for living expenses in retirement.
For example, assuming you want to replace 70% of your pre-retirement income:
- If your annual pre-retirement income is $20,000 per year: your standard of living in retirement will likely be maintained by OAS and CPP income, even without additional income from savings.
- If your annual pre-retirement income is $40,000 per year: in addition to OAS and CPP income, you would need an additional $11,795 per year, which must come from your personal savings and/or workplace pension plans to maintain your standard of living in retirement.
- If your annual pre-retirement income is $75,000 per year: in addition to OAS and CPP income, you would need an additional $33,329 per year, which must come from your personal savings and/or workplace pension plans to maintain your standard of living in retirement.
Canada Pension Plan
Almost all individuals who work in Canada contribute to the Canada Pension Plan (CPP). The CPP provides pensions and benefits when contributors retire, become disabled, or die.
You can apply for and receive a full CPP retirement pension at age 65 or receive it as early as age 60 with a reduction, or as late as age 70 with an increase.
If you continue to work while receiving your CPP retirement pension, your CPP contributions will go toward post-retirement benefits, which will increase your retirement income.
If you become severely disabled to the extent that you cannot work at any job on a regular basis, you and your children may receive a monthly benefit.
When you die, CPP survivor benefits may be paid to your estate, surviving spouse or common-law partner and children.
Married or common-law couples in an ongoing relationship may voluntarily share their CPP retirement pensions.
Credit splitting for divorced or separated couples
The CPP contributions you and your spouse or common-law partner made during the time you lived together can be equally divided after a divorce or separation.
Old Age Security
The Old Age Security program is the Government of Canada’s largest pension program. It is funded out of the general revenues of the Government of Canada, which means that you do not pay into it directly.
Old Age Security pension
The Old Age Security (OAS) pension is a monthly payment available to most Canadians 65 years of age who meet the Canadian legal status and residence requirements. You must apply to receive it.
In addition to the Old Age Security pension, there are three types of Old Age Security benefits:
Guaranteed Income Supplement
If you live in Canada and you have a low income, this monthly non-taxable benefit can be added to your OAS pension.
If you are 60 to 64 years of age and your spouse or common-law partner is receiving the Old Age Security pension and is eligible for the Guaranteed Income Supplement, you might be eligible to receive this benefit.
Allowance for the Survivor
If you are 60 to 64 years of age and you are widowed, you might be eligible to receive this benefit.References: