Retirement planning for the self-employed
Many solopreneurs plan on continuing their self-employment, even after they reach 65. But what are the implications? Can you continue to work? How will it affect your CPP? And just how much CPP will you get anyway?
That’s what we’ll cover in today’s article. (It’s a weighty article, so we’ll cover part 1 today, and part 2 next week.)
Just a note: I am not a financial advisor, so do not take any of this Information as advice. Instead, it is information to think about and take to your own financial advisor to see what options are actually best for you.
Canada’s Pension System
When most people say “CPP” they mean all the money they will get from the Government when they retire. However, from the Government’s point of view, CPP specifically refers to only one payment you will receive. But there are actually 3 separate payments.
1. Canada Pension Plan (CPP)
2. Old Age Security (OAS)
3. Guaranteed Income Supplement (GIS)
The total amount you get from the Government is the sum of how much you are eligible for from each of those 3 pools.
Let’s take a closer look at each of those pools.
Canada Pension Plan (CPP)
This pool of money is where all the CPP deductions taken from your salary over the years goes. How much your benefits will be when you retire depends on two factors.
1. The total of all the CPP deductions taken from your paycheques over your working career;
2. The age at which you begin receiving CPP benefits.
The more deductions taken from your paycheque over the years, the higher your CPP will be. The maximum CPP benefit anyone can get is currently about $12,000 per year. However, the majority of people do not get this much. The average amount is closer to $7,000.
While most people begin receiving their CPP at age 65, you can elect to begin receiving it as early as age 60, or as late as age 75. Usually, the longer you wait, the higher your monthly benefit will be.
Old Age Security (OAS)
This pool of money has nothing to do with any deductions taken from your paycheques. It is a totally separate pool of money, funded completely by the Government. It is available to almost all seniors. To qualify, you simply have to have lived in Canada for a certain number of years. How many of those years you worked makes no difference. It is based solely on your years of residency.
The longer you have lived in Canada, the higher your monthly benefit will be. Those who have lived 40 or more years in Canada qualify for the maximum amount, which is currently about $8,700 per year.
Guaranteed Income Supplement (GIS)
This is the third pool of money paid out to seniors. However, it is not paid to everyone. It is reserved for those seniors whose retirement income is less than about $20,000 per year. This might be the case if the person did not work for many years, or they have no company pension or RRSP income, etc. The GIS helps increase their income somewhat.
Neither the CPP nor the OAS is dependent on how much you get from any of the other 2 pools. However, the GIS amount you receive depends on your total retirement income, and therefore in part on your CPP (OAS is not considered income). Also, any other income you have (company pension, part-time employment, self-employment) is taken into account when determining if you qualify for GIS and, if so, how much you are eligible for.
Can I continue to work while receiving pension payments from the Government?
You can continue to work, even if you are receiving government pension payments. The amount of your OAS will not change, nor will the amount of your CPP (unless you continue to work and have CPP deductions taken off of your paycheque, in which case your CPP may go up accordingly).
GIS payments can be affected if you continue to work. That’s because GIS has a clawback rule which states that if you earn extra money, say from self-employment, your GIS benefit will go down. However, it will not start going down until you earn an extra $5,000 per year in income (that first $5,000 is exempt from clawback). For any money earned above that, your GIS is clawed back 50 cents for every dollar you earn.
That means for every extra dollar you earn over $5,000, you still get $0.50 from GIS. That works until you reach the maximum allowable earnings, at which your GIS is down to zero.
Should I take my pension early?
You can elect to start receiving your CPP as early as age 60. However, your monthly payments will be less than if you waited, and will continue to be less even when you reach age 65. On the other hand, taking your CPP early means you will receive some money between age 60 and 65. You cannot take OAS or GIS early, you have to wait until you are 65.
Many of us have probably heard that it is beneficial to wait until you are 65 to start receiving your CPP, since your payments will be higher. However, there are some cases in which it may be beneficial to take your CPP early. One of those might be if you need the money.
If you are in need of money and you are only 60, then starting your CPP early may make sense. This is especially true for those who expect to have low retirement income. That’s because your total pension is made up of CPP + OAS + GIS. If your CPP goes down because you started taking it early, then your GIS will likely go up, and you may end up having approximately the same total income at 65 that you would have if you waited to take your CPP until you actually turned 65. But you will have earned money from CPP between age 60 and 65.
Another situation for which some financial planners suggest that it may be beneficial to start taking your CPP early is if you plan on working (a job or self-employment) after age 65 and your expected CPP is low. We’ll get into that scenario in next week’s article.
* * *
So that’s the overview of Canada’s government pension system. Next week we’ll pick up the topic, and go into some examples so you can see how all the parts fit together.
See you then!
Cheers,
Tim
Helping you engineer the business of you
Information in this article is for general purposes and is not intended as professional advice.