INDEPTH: RETIREMENT
Glossary
by Peter Hadzipetros, CBC News Online | Research: Laura Carlin | Feb. 11, 2005
CPP
Canada Pension Plan. It provides money to anyone who's ever held a job in Canada and paid a CPP premium. What you receive depends on how much you've paid into the system. The maximum monthly pension as of Jan. 1, 2005, is $828.75 – or about 25 per cent of the average national wage. You don't have to wait until you're 65 to collect CPP – although benefits are reduced by six per cent for each year you collect before 65.
QPP
Quebec Pension Plan. Pretty much a mirror image of the CPP, except it's run by Quebec. If you started your working life in Montreal and wrapped it up in Yellowknife, you'd get the same benefit as if you had spent every working day in either city.
OAS
Old Age Security. Available to most Canadians aged 65 or older – even if you never worked. You qualify for full OAS benefits if you've lived in Canada for 40 years after turning 18; or
- You were born on or before July 1, 1952.
- Between the time you turned 18 and July 1, 1977, you lived in Canada for some period of time.
- You lived in Canada for the 10 years immediately before your application was approved.
OAS is meant to supplement the retirement incomes of lower- and middle-income Canadians. OAS benefits are "clawed back" if your retirement income is more than $60,806. For every dollar you earn above that, the government takes back 15 cents. Your OAS benefit is reduced to zero if your retirement income is $98,547 or higher. Those income levels are as of Jan. 1, 2005. They are adjusted for inflation every three months.
GIS
Guaranteed Income Supplement. Paid to lower-income pensioners to boost their total.
C/QPP/OAS income. For a single person, the maximum payment is $560.69 on top of OAS and Q/CPP to a total maximum government pension of $13,464. Couples (married or common-law, opposite-sex or same-sex) can collect GIS payments to a maximum total combined pension income of $32,592.
RRSP
Registered Retirement Savings Plan. These have been around since the late 1950s but only started to gain popularity in the late 1970s when the rules were changed making them a more attractive way to save for retirement.
An RRSP allows you to shelter some of your income from taxes. Your taxable income is reduced by the amount you put away each year. That lowers your tax bill and leaves you with a healthy tax refund. The money inside the RRSP grows tax-free and is only taxed when you withdraw it – normally, after you retire when your income is lower and you're taxed at a lower rate.
You don't have to wait until you're on your rocker to dip into your RRSP. You can also use it to buy a house, further your education or get through tough financial times.
Defined Benefit Pension Plan
This type of pension plan guarantees a pre-set lifetime pension after a certain number of years of service. The better ones include some indexing for inflation. In most cases, the benefits promised – say, 70 per cent of pre-retirement income – include what you will receive from CPP and OAS. Usually, you'll have to stay with the company for 35 years to receive the maximum.
Both the employee and the employer contribute to this type of plan. It's the employer's responsibility to make sure the plan is properly funded to pay the promised benefits.
Defined Contribution Pension Plan
With this type of plan, the level of payout is not guaranteed. You and/or your employer contribute a set amount of money each year. Your retirement income is based on how the pension plan's investments perform. These plans are often not indexed for inflation.
Group RRSP
This type of plan is growing rapidly in popularity as an option for companies wanting to offer pension plans to their employees. It's essentially a collection of individual RRSPs administered by one financial firm that has entered into an agreement with an employer. There is very little cost to the employer, so it's a cost-effective way to offer a pension plan.
Some employers make contributions subject to certain conditions – like the money remains in the plan for a certain period of time. Often it's up to the employee whether to take part.
Pension Adjustment
If you're a member of some kind of employer-sponsored pension plan (except group RRSP), there will be a pension adjustment on your T-4 slip. Check Box 52 for the amount.
This figure is an expression of the value of your pension plan – and it reduces what you can put into your own RRSP.
The government allows you to put 18 per cent of your pre-tax income into an RRSP every year, to a maximum of $15,500 (2004 tax year). If your pension adjustment is $9,000, you can contribute $6,500 to your RRSP.
The pension adjustment is designed to allow people to build similar retirement funds whether they're part of a pension plan or have to do it all on their own.
YMPE
Year's Maximum Pensionable Earnings. This figure is set each year by the federal government, based on the average wage in Canada. It's what the CPP is based on. Maximum CPP payouts are designed to replace 25 per cent of this figure. In 2005, the YMPE is $41,100.
The rule of 72
The number 72 is critical in determining how rapidly – or slowly – your savings will grow. Divide 72 by the rate of growth of your savings and the number you are left with is the number of years it will take for your savings to double.
For instance, if you have $5,000 in your RRSP and it earns eight per cent a year, it will grow to $10,000 in nine years. That's the good news.
But it works the other way, too. Say you've worked hard all your life and have managed to put away enough to fund a pension of $50,000 a year for life. You pack it in at 65. If you're in good health and longevity is in your family, there's a good chance you'll see your 90th birthday. If inflation runs at three per cent a year, the purchasing power of that $50,000 you retired on has been cut in half.
To maintain your lifestyle, you'd have to find new income, unless you're one of the lucky few whose pensions are fully indexed to inflation.
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| NEWS ARCHIVE: |
Britain to raise retirement age (May 25, 2006)
Richmond tops life expectancy list (CBC BC, Feb 2, 2005)
Canadians made little economic headway in past 15 years: TD economists (Jan 18, 2005)
Pension legislation changes on the way (CBC Manitoba, Dec. 7, 2004)
Ontario court upholds CPP benefits for same-sex couples (Nov 26, 2004)
Mandatory retirement ban won't be retroactive: labour minister (CBC Ottawa, Nov.3, 2004)
Martin against mandatory retirement (Dec. 20, 2003)
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