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Tag: Income Splitting

  • Which types of pension income can be split with your spouse in retirement? – MoneySense

    Which types of pension income can be split with your spouse in retirement? – MoneySense

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    Here, we’re focusing on splitting pension income, which can include income sources that are not from traditional pensions.

    Can you split your income?

    Here’s a quick table for when you can and when you can’t split your income. Tap the pension income type to keep reading for the why and how.

    Income splitting for DB pensions

    When people think of pensions, they typically think of defined benefit (DB) pension income. DB pensions are calculated based on a formula that generally considers annual income and the number of years as an employee with the employer offering the pension, along with other factors, too. Most DB pensions will not make payments until age 55, but it may be possible to collect a pension earlier.

    DB pension income qualifies to split with your spouse or common-law partner. You can move up to 50% of the income to your spouse on your tax returns. You claim a deduction and they claim an income inclusion. You would only split pension income if it resulted in a net advantage, whether a reduction in combined tax payable or an increase in government benefits.

    Can you split income for SERPs?

    Supplemental executive retirement plans (SERPs) are non-registered plans for executives or other employees. And it bears mentioning that a supplemental DB pension, or top-hat executive pension, with payments that exceed the registered pension plan (RPP) maximums will not qualify for splitting.

    These pensions include a registered portion and an unregistered portion. The registered portion can be split, but the unregistered portion can only be reported on the recipient spouse’s tax return. The split between registered and unregistered will be reported on the pensioner’s government-issued tax slip so should be clear.

    What about RRSPs?

    Most people’s retirement savings are in their registered retirement savings plan (RRSP) account, including defined contribution (DC) pensions. RRSP withdrawals do not qualify for pension income splitting. However, if you convert your RRSP to a registered retirement income fund (RRIF), subsequent withdrawals will qualify starting when the account holder reaches age 65.

    You do not have to convert your RRSP to a RRIF until December 31 of the year you turn 71, with withdrawals beginning at age 72. But the ability to split RRIF withdrawals at 65 may cause someone to consider converting their account by age 64.

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    Jason Heath, CFP

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  • Single, no pension? Here’s how to plan for retirement in Canada – MoneySense

    Single, no pension? Here’s how to plan for retirement in Canada – MoneySense

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    • Canada Pension Plan (CPP) deferral: CPP deferral is worth considering for any healthy senior in their 60s. If you live well into your 80s, you may collect more pension income than if you start CPP early, even after accounting for the time value of money and the ability to invest the earlier payments or draw down less of your investments. CPP deferral can protect against the risk of living too long, especially for a single retiree, and particularly for women, who tend to live longer than men. CPP can be deferred as late as age 70. The benefit increases by 8.4% per year after age 65, plus an annual inflation adjustment.
    • Old Age Security (OAS) deferral: Like CPP, deferring OAS can be beneficial for seniors who live well into their 80s. One exception is low-income seniors who might qualify for the Guaranteed Income Supplement (GIS) between 65 and 70. Single seniors aged 65 and older, whose income is less than about $22,000, may qualify. OAS can be deferred as late as age 70. The benefit increases by 7.2% per year after age 65, plus an annual inflation adjustment.
    • Annuities: Almost everyone wants a pension, yet almost no one is willing to buy one. You can buy an annuity from a life insurance company using non-registered or registered (ie. RRSP) savings. (What is a non-registered account? How does it work?) Based primarily on your age and resulting life expectancy, an insurer will pay you an immediate or deferred monthly amount for life—even if you live until 110. If interest rates are higher when you buy an annuity, the monthly payment amount may be slightly higher as well. If you don’t have a pension and you want the security of a monthly payment, an annuity can be worth considering. Especially if you’re in good health and are a conservative investor.

    Survivor benefits in Canada

    Most DB pension benefits are payable only to surviving spouses. Some pensions have survivor benefits for children or a guaranteed number of months of payments to an estate.

    A CPP survivor pension can be paid to the spouse or common-law partner of a deceased contributor. Single retirees are somewhat disadvantaged since their children will usually not qualify for a benefit if they die.

    Children’s benefits are only payable if a surviving child is under 18, or if they are attending full-time post-secondary education and are between 18 and 25.

    Advice, accountability and cognitive decline

    One of the challenges everyone faces as they age is making sound financial decisions. Our experience and knowledge may increase as we age but our ability to process complex decisions tends to begin declining before we retire.

    Single seniors don’t have a partner to bounce ideas off, so many may find themselves stressed about retirement and financial planning. And not everyone feels comfortable talking about money with their children and friends, and not everyone has a financial advisor, either. (Use the MoneySense Find a Qualified Advisor Tool to find an advisor near you.)

    Partners, adult children and friends can provide accountability, as well with spending and other financial decisions and keep each other in check.

    A single retiree can certainly be successful, but the challenges they face are different from that of couples.

    For these reasons, being conservative, deferring pensions, considering annuities, seeking financial advice, and proactively planning are all strategies to consider when planning for retirement as a one-person household—especially if you have no pension plan.

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    Jason Heath, CFP

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