How Does the Pension System Work in Ontario?

The Big Picture: Four Building Blocks

Retirement income does not normally come from one pension or program. Most retirees receive money from several sources.

A simple way to understand the system is to divide it into four building blocks:

Income-support programs provide an additional safety net for eligible lower-income seniors.

1. Government Pensions

Old Age Security (OAS)

Old Age Security is a federal pension that may be available starting at age 65.

It is based mainly on how long you have lived in Canada after age 18. You do not need to have worked or contributed to receive it, but you must meet the applicable legal-status and residence requirements.

People who have lived in Canada for fewer than 40 years after age 18 may receive a partial pension.

Higher-income recipients may have to repay part or all of their payments through the Old Age Security recovery tax.

Canada Pension Plan (CPP)

The Canada Pension Plan is based on your employment earnings and the contributions made by you and your employers during your working years. Self-employed people make both portions of the contribution.

Your retirement payment generally depends on:

• how much you contributed;
• how long you contributed;
• your employment earnings; and
• the age when you begin receiving payments.

You can begin payments from age 60 to age 70. Starting earlier produces a lower monthly payment, while delaying produces a higher monthly payment.

The Canada Pension Plan also provides other benefits, including survivor, disability, death and post-retirement benefits.

2. Income-Support Programs

Income-support programs help eligible people with lower retirement incomes. They are generally based on income rather than employment contributions.

Guaranteed Income Supplement (GIS)

The Guaranteed Income Supplement is a federal monthly payment for eligible lower-income Old Age Security recipients who live in Canada.

The amount depends on income and marital status. Income from employment, pensions and taxable retirement-account withdrawals can reduce the payment.

Allowance

The Allowance may be available to an eligible lower-income person aged 60 to 64 whose spouse or common-law partner receives the Guaranteed Income Supplement.

Allowance for the Survivor

The Allowance for the Survivor may be available to an eligible lower-income widow or widower aged 60 to 64 who has not remarried or entered a new common-law relationship.

Ontario GAINS

The Ontario Guaranteed Annual Income System provides an additional monthly, non-taxable payment to eligible lower-income Ontario seniors.

It is paid on top of Old Age Security and the Guaranteed Income Supplement. Eligible recipients normally do not need to submit a separate application, but they must file an annual income tax return.

3. Workplace Pensions

Not everyone has a workplace pension. Those who do will usually have one of two main types.

Defined Benefit Pension Plan (DBPP)

A defined benefit pension promises a retirement payment calculated using a formula. The formula commonly considers your earnings, years of employment and age at retirement.

The pension plan is responsible for investing the pension fund and providing the promised benefit under the terms of the plan.

Defined Contribution Pension Plan (DCPP)

With a defined contribution pension, you and your employer may contribute to an investment account.

Your eventual retirement income depends on:

• the amount contributed;
• investment performance;
• fees;
• the age when withdrawals begin; and
• how the accumulated money is converted into retirement income.

Unlike a defined benefit plan, a defined contribution plan does not normally promise a specific lifetime monthly payment.

Ontario Pension Rules

Many Ontario workplace pensions are regulated under Ontario pension legislation. These rules can affect:

• when pension money becomes locked in;
• available retirement-income options;
• survivor rights;
• transfers after leaving an employer; and
• limited circumstances in which locked-in money may be withdrawn.

Money transferred from an Ontario pension plan may be placed in a locked-in retirement account and later converted to an income-producing account, such as a life income fund.

Some workplace pension plans are federally regulated or governed by another province, so the rules applying to a particular pension should always be confirmed with the plan administrator.

4. Personal Savings

Personal savings provide flexibility beyond government and workplace pensions.

Registered Retirement Savings Plan (RRSP)

Contributions to a registered retirement savings plan can reduce taxable income, subject to the available contribution limit.

Investments grow without annual tax while they remain inside the account. Withdrawals are generally taxable income.

By the end of the year in which you turn 71, you must generally:

• withdraw the account balance;
• transfer it to a registered retirement income fund; or
• use it to purchase an eligible annuity.

Registered Retirement Income Fund (RRIF)

A registered retirement income fund is commonly used to provide income from savings previously held in a registered retirement savings plan.

Withdrawals are taxable. A minimum amount must be withdrawn annually beginning in the year after the fund is established.

There is no maximum withdrawal from an ordinary registered retirement income fund, although locked-in retirement accounts can have different rules.

Tax-Free Savings Account (TFSA)

Contributions to a tax-free savings account are not tax-deductible.

Investment growth and withdrawals are tax-free. Withdrawals also do not affect federal income-tested benefits such as Old Age Security or the Guaranteed Income Supplement.

This can make the account useful for emergencies, large purchases and flexible retirement-income top-ups.

Non-Registered Savings and Investments

These are savings and investments held outside registered accounts.

Interest, dividends and realized capital gains may be taxable. The way each type of investment income is taxed can differ.

How the Building Blocks Work Together

1. A foundation of government pensions. Old Age Security and the Canada Pension Plan may provide a base of ongoing income.
2. Income-support payments when eligible. Lower-income retirees may also qualify for the Guaranteed Income Supplement, Ontario GAINS or related programs.
3. A workplace pension. A workplace plan may provide lifetime monthly income or an accumulated account that must be converted into retirement income.
4. Withdrawals from personal savings. Personal accounts can supplement pension income and help cover changing expenses.

There is no single withdrawal order that is best for everyone.

Some people may benefit from using registered savings before beginning government pensions. Others may benefit from starting government payments earlier or preserving registered savings for later.

The appropriate choice can depend on:

• current and future tax rates;
• eligibility for income-tested benefits;
• health and life expectancy;
• whether the person is still working;
• available pension and savings balances;
• survivor needs; and
• the need for flexible or emergency funds.

The Main Planning Decisions

Once you understand the building blocks, the most important questions are usually:

• When should I begin receiving government pensions?
• How much retirement income will I receive?
• Will that income cover my expenses?
• Which savings account should I use first?
• How will withdrawals affect my taxes and benefits?
• Will my savings last throughout retirement?
• What income would a surviving spouse receive?

RetireON’s guides, glossary and calculators are designed to help you explore these questions one at a time.