Retirement System in Canada

Canada ranks fourth in the world in terms of pension assets, leaving the top three positions only to the U.S., Japan and the UK. The number of pension funds is approximately 150.

Three levels of Canada’s retirement system

  • Old Age Security;
  • The Canada Pensіon Plan (CPP);
  • individual pension plans.

Old Age Security

Old Age Security is a basic pension which is given to almost all individuals, aged 65 and older, who have lived in Canada for a certain number of years. Typically, in order to obtain this pension you must live in Canada for at least 10 years after reaching adult age.

A full pension is obtained by those who have lived in Canada for at least 40 years. People, who have lived in Canada for less number of years, are entitled to a partial pension. The size of the basic old-age security is about $440 per month. If by the end of work a person has a low income or does not have it at all, except for the basic pension, he is entitled to a so-called guaranteed premium income. Guaranteed premium income is added to the basic monthly pensions. The maximum amount of allowance is equal to about $500.

If the total income of an individual exceeds the threshold, the basic pension will be reduced. This threshold varies annually because of the influence of inflation. About 5% of pensioners in Canada receive incomplete basic pensions, and only 2% lose their pensions entirely. The amount of public pensions and guaranteed income allowances are to be revised every three months due to inflation.

The Canada Pensіon Plan

The Canada Pensіon Plan provides monthly pension payments to people who worked and made payments under this plan. Such payments can be made by both employers and workers. The amount of payments is 3.9% of salary. At the same time employer, who pays such fees, establishes a number of conditions for employee (in most cases they are related to the disposal of accumulated assets in the case of employee’s dismissal, the terms of bonuses, etc.) under which such payment will be made to his account.

Types of retirement plans

1. Mandated Occupational Pension Plans, under which employers or trade unions have the opportunity to organize pension plans, but are not obliged to do so. Also, participation in these plans for employees is voluntary. The employer, who had organized the plan, is obliged to make payments into it.

2. Mandated Personal Pension Plans, in which personal plans can be created by employers that may participate in payments (for example, make 50% of the employee’s payment to the plan).

3. Additional Occupational Pension Plans may be set up by employers and trade unions for civil servants and private sector. Plans can be arranged with defined payments and defined benefits. Such plans work as the insurance plans at the same time, providing disability benefits. Payment to CPP is calculated as a percentage of revenue (here the minimum and maximum rates of income, set by the government for these purposes, are taken into account). The maximum size of such pension accounts for $755 a month, if taken at 65 years of age.

The common age for receiving CPP pension is 65 years. However, you can start receiving it since 60. When retiring before reaching 65, the person must quit a job or earn less than the maximum allowable amount for the required period of time. If people retire earlier, the pension will shrink by 0.5% each month until they reach 65. In the case of retirement after reaching 65, the pension increases by 0.5% each month. The monthly CPP pension is also subject to recalculation due to inflation, but, unlike public pensions and guaranteed bonuses, it happens only once a year – in January.

Individual pension plans

Individual retirement plans are opened in addition to the two state programs. In Canada, these programs are called Registered Retirement Savings Plan (RRSP). Of the 32 million people living in Canada about 8 million of them have their individual pension plans.

Individual pension scheme permits to make payments up to 18% of income received in the previous year, to a maximum of $15,500. If during the year the person pays only a fraction of the maximum amount of his RRSP, then the rest of the amount can be transferred the next year.

You can make payments for individual pension plans until you reach 69. After 69 it is necessary to convert the accumulated funds to the so-called Registered Retirement Income Fund, from which pensions are furtherly paid or purchase annuity. Another option is removing all accumulated amount at once. However, this is the most unprofitable option.

All pension benefits that a person receives after reaching retirement age are taxed (the only exception is guaranteed premium income). The tax rate depends on the income and ranges from zero rate to 46% (it should be noted that the administrative system in Canada is such that in different provinces there may be additional taxes). With regard to interest rates when withdrawing retirement savings: when withdrawing amounts less than $5,000 – 10%, less than $15,000 – 20%, mare than $ 15,000 – 30%.

Supervision of financial markets in Canada is performed by the Office of the Superintendent of the Financial Institutions (OSFI). It is functioning since 1987, with reporting to the Minister of Finance and supervising banks, insurance companies, credit companies, trust societies, pension funds and other financial institutions.

Pension plans are regulated by the Income Tax Act, as well as regulatory laws in each of the province of Canada. The national pension plans are regulated by the Pension Benefits Standards Act.

In addition, there are also several associations, among them: Pension Investment Association of Canada (PIAC), with a membership of 135 largest pension funds, the assets of each of which exceeds $500 million; Association of Canadian Pension Management (ACPM). Associations hold annual conferences, conduct pension market research, accumulate information and make statistical databases.

Read also: