Pensions are definitely a political “hot potato” in most countries around the world as population demography changes with an increase in the numbers of retired citizens. Canada is no exception as private pension schemes are being promoted to take the heat off the Governments Canada Pension Plan that many analysts believe will not be able to cope in the future. Please note that any pension payments are classed as income and will be subject to standard taxation rules. Using the services of a professional financial planner will enable you to plan your retirement income in the most tax efficient way.
There are 3 levels of pensions:
Old Age Security
The most basic level of state pension is the Old Age Security payments. This is available as a monthly payment to most people over the age of 65.
Canada Pension Plan (CPP)
Once you are working in Canada, your paychecks will show deductions for the CPP to a set annual limit (approx $1800) (Quebec has its own system). The amount you pay is based upon 2 limits and your employment type (self or employed). The lower limit is frozen at $3500 and the maximum limit (adjusted every year), currently $40,500 – you will only pay a percentage of the income between these limits. If you earn $100,000 a year you will not pay any more into the plan than someone on $50,000 a year. These payments will enable you to receive benefits from the plan should you become disabled or retire and, if you die, to your surviving family members.
To encourage Canadians to save for their retirement, the Government has given substantial tax breaks to people who pay into Registered Retirement Savings Plans – RRSP. The plans are government sponsored but privately administered with management fees charged by the companies that offer them. All capital gains in the plan are sheltered tax free while the plan is in force. Any cash withdrawn in retirement is declared as income on your annual tax return.
There are annually adjusted limits on the amount you can contribute to your RRSP. These are 18% of your previous years “Canadian” salary to a maximum of $14500. This is where being an immigrant becomes a pain. Basically, you will not have an allowance for the first calendar year you are living in Canada so any payments you make will be classed as an over contribution. You can get away with a $2000 over contribution, but over that you will be taxed. If your employer pays into a company plan that is a benefit for all the employees you will not be penalized – just be careful with any voluntary payments.
There are special rules governing the use of RRSP funds. Some plans are locked in and therefore inaccessible until the plan matures. Most RRSP aren’t locked in and so are available to be withdrawn before plan maturity though penalties and conditions will apply.
Many couples opt to use a spousal RRSP. If one partner earns substantially more than the other this gives a tax break straight away by giving the higher paid partner some of the other person’s allowance. The retirement income is evenly split between the two which will reduce the tax paid.
Normal retirement age is 65 though you can work beyond that. Before age 69 you will have several options.
Before You Leave (For newcomers)
The chances are you will have pension schemes in the country you are leaving – either private or state run. This can cause a major headache to sort out.
The first thing to do is to ensure that you have up to date information on all pensions you may be entitled to and these plans have your latest contact details. Most pensions will pay out only if the plan holder contacts THEM. You must ensure you have the contact details and let them know you are moving to Canada.
Check and get written confirmation that the pension plan will pay to a Canadian bank account – if not you will have to make alternative arrangements
For state pensions, Canada has social security agreements with many different countries regarding qualifying time for state pensions so check these to see if it helps you.
If you choose to transfer to a Canadian plan, check to see how much it will cost and if there are any additional penalties incurred as it may not be worth it. If it is ensure all the ground work is completed before you leave and you have points of contact to deal with to make it a smooth transfer or someone to sort it out if its not! You cannot open a Canadian Pension until you have a SIN (Social Identification Number) so this can’t be done until you have landed.