- September 11, 2023
- Posted by: legaleseblogger
- Category: Related News
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Can AI Legalese Decoder Help with the Swapping of Retirement Income Sources for Late Starters with a Defined Benefit Pension?
Hypothetically speaking, one might wonder if the advantages of a defined benefit pension would still be significant for someone who begins saving late in life and has not amassed much savings to commence with. This concept came to mind during a conversation with a family acquaintance who recently achieved a municipal position with a DB pension, despite being in their mid to late 50s. According to him, he has not made substantial contributions towards his retirement savings and is understandably thrilled about this new turn of events.
However, uncertainties arise when considering the potential drawbacks such as clawbacks for Old Age Security (OAS) and Guaranteed Income Supplement (GIS) – benefits that he could have been eligible for had he continued on his previous trajectory. Is it possible for someone in this situation to merely exchange the source of their retirement income? Instead of receiving a combined total of, for example, $1700 from Canada Pension Plan (CPP), OAS, and GIS, could he now receive $1700 solely from CPP and his DB pension, while obtaining a lesser amount from OAS?
It is important to clarify that I am aware that a DB pension is generally advantageous and provides significant benefits in most cases. Nevertheless, I am curious to hear from experts in the pension field regarding this scenario. I personally do not possess expertise in this area.
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Well, if he is starting the pension in their 50s, it will be small. The good news, is that’s it’s guaranteed money, as small as it is.
OAS clawbacks start at $80k’ish so likely the pension and CPP will be over $80k unless they also are pulling other income from RRSP or taxable accounts.. GIS $21k for single/widowed.
Canadian seniors have a minimum income of about $21K for single seniors.
If his retirement income is below this threshold he would have gotten topped up until he hit it. So yes you can replace say GIS with a DB pension while under this threshold.
However, once your CPP+OAS+Pension+RSP is over $21K a year than it is more money in your pocket.
it’ll be smaller since he has less years of contributory service, but will still come out ahead.
It’s unlikely under most realistic scenarios where it would come out as a wash, unlike RRSP savings which can easily become a negative if a person would be getting GIS.
Another more important factor IMHO to consider is that DB contributions are *most* efficient when you start at an older age. This is because you’re paying the same amount per year as a younger employee, and accruing the same benefit per year, but the cost to provide you with an equivalent annuity at an older age is far more. (Yes, the overall pension will be lower, but that’s the wrong way to look at it — consider the yearly accrual.)
There are other perks to consider such as ability to opt in to the same medical and dental plan after retirement for a lower fee than you would pay if you were to sign up for one yourself. Life insurance for estate might be part of the retirement package as well.
If you do the math on the OAS and GIS clawbacks you’ll see that this is not going to be a “wash”. The DB benefit will exceed the cost of clawback for virtually all Canadians. There is probably some convoluted case that could be manufactured where this isn’t so, but I doubt it.
It won’t be a wash in the sense that it’s still a pension. That said it will be a small pension as payout is based on years of service. Late 50’s so let’s assume 58 with retirement at 65. That’s 7 years of contributory service. Approximate 2% of salary of per year of service, that’s 14% of salary paid out per year for life.
Chances are they aren’t hitting any claw back thresholds, and any guaranteed income is good to have.
He will keep CPP/OAS as is. OAS clawback and GIS don’t coexist. Losing GIS usually means you’re slightly better off.
His GIS will be reduced 50%, but that means he keeps 50%. Keeping half is better than nothing.
Optimally, he would have a TFSA instead, but that’s not an option. The TFSA route is where you get to keep GIS and have extra income.