A Wrinkle In The Canada Pension Plan
The CPP includes a survivor benefit. If you die before your spouse you can receive a survivor benefit of 60% of the pension they had earned. Simple, and reasonable enough.
The thing they don’t mention.
The total of your retirement pension and the survivor benefit cannot exceed in total the maximum CPP retirement benefit for the year. For example, If you are entitled to maximum CPP retirement benefits and your spouse dies, you can collect nothing from the survivor benefit.
- Delaying beginning your retirement pension can hurt you. You could receive up to 30% extra by waiting to age 70, but if your spouse dies you will get nothing extra from the survivor option.
- If your spouse passes before age 65, you should consider taking your retirement pension immediately. While it will be lower than what you could have had, the overall maximum will not affect you as much after age 65, and you will have extra money in the meantime. Arithmetic question only.
- When planning, don’t assume you will get the 60% number. It is possible that just like Old Age Security, the CPP pension could disappear at death.
First death issues are not simple
Sometimes the easily digested story is simple enough, but it doesn’t always apply to you. Think about these things before you decide on your plan.
- Your spouse may have problems managing your assets after death. Ask yourself if they could manage them today and without any help from you?
- Except for income that dies when the other passes on, all of the income you presently share will end up on one tax return. Given the OAS Clawback when total income exceeds $81,761. the survivor could see total income fall and total tax go up. Unattractive at best. Not rare.
- Cost of living will fall but not as much as people think. Certainly not by half. Possibly 10%
- There are some tax opportunities at the first death. Everyone thinks “rollover” the taxable assets and defer the tax until the second death. Sometimes it is an advantage to let some fall into the first estate. That is especially true if the deceased passed away early in the calendar year. Use up the low rate brackets. There is little won in deferring tax payable under 35% or so and then paying later at 53%
As always, anticipate the possibilities and give your executors options.
The bit to take away
Anticipate the future and do what you can to soften the financial and other problems.
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I build strategy and fact-based estate and income plans. The plans identify alternate ways and alternate timing to achieve both spending and estate distribution goals. In the past I have been a planner with a large insurance, employee benefits, and investment agency, a partner in a large international public accounting firm, CEO of a software start-up, a partner in an energy management system importer, and briefly in the restaurant business. I have appeared on more than 100 television shows on financial planning, have presented to organizations as varied as the Canadian Bar Association, The Ontario Institute of Chartered Accountants, The Ontario Ministry of Agriculture and Food, Banks – from CIBC to the Business Development Bank.
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