What you need to know about your retirement income sources

You have a few options for retirement income

Retirement income, like your income before you retire, can come from a lot of different sources. You may decide to work full or part time in retirement, you may have rental properties, or you might have assets you can sell. But retiring also triggers new sources of income, many of which have rules that you should know as you’re planning how you’ll live in your retirement years. 

Learn the basics of government-funded retirement income 

Canadians may receive income in retirement from the following sources: 

• OAS—Most Canadians over the age of 65 will receive Old Age Security (OAS) payments, with the key exceptions of those with very high income and those who don’t meet residency requirements.
• CPP/QPP—The Canada Pension Plan (CPP)/Quebec Pension Plan (QPP) programs pay a benefit to retired and disabled workers and their survivors. 
• GIS—Low-income senior citizens are eligible to receive the Guaranteed Income Supplement (GIS), a nontaxable benefit.

Now learn the rules for your retirement savings plans

You may have several types of retirement savings plans, and you should be familiar with which ones have retirement-related rules and which don't. Why? By law, you may be required to turn some of them into retirement income accounts, so make sure you're familiar with the rules that apply to your own accounts.  

NRSPs and TFSAs—no rules for retirement

You may have some money set aside in tax-free savings accounts (TFSAs) or a few non-registered savings plans (NRSPs), such as: 

• Savings and chequing accounts
• Non-registered investments and brokerage accounts

These accounts don’t require you to do anything different with them when you retire. You may continue to save or withdraw money from them as you always have.

Traditional defined benefit pension plans provide retirement income 

Although some companies still offer their employees traditional pension plans—also known as defined benefit plans—they’re not used as much as they once were. A traditional pension plan pays you a guaranteed amount (a defined benefit) throughout your retirement years. If you have a traditional pension plan, you have to let your plan administrator know when you plan to retire and want to start receiving your money. 

Registered retirement plans and accounts—know the rules 

If you have registered retirement accounts, you're required to convert them to retirement income accounts no later than the end of the calendar year when you turn 71.

What are the different types of retirement income accounts? 

You choose the income account based on the type of retirement savings account you’re converting from. Here’s a brief description of the different retirement income accounts. 

RRIFs are available from financial institutions and must pay you a minimum amount starting in the year after you transitioned to the account. There's no maximum to how much you can withdraw every year. Money in your RRIF grows tax deferred and is only taxed when paid out. Depending on where you earned the pension, you may also have a prescribed Retirement Income Fund ((PRIF) in Manitoba and Saskatchewan).

Life or term-certain annuities are typically sold by insurance companies and pay you a regular, guaranteed amount either over an agreed-on period of time or for life. 

Cash may also be an option, which means you can dissolve the account and turn it into cash or take part in cash and part as an RRIF, a LIF, a Locked-in Retirement Income Fund (LRIF), a Restricted Life Income Fund (RLIF), or a PRIF. Depending on the type of account, you may be taxed on the entire amount in the year you withdraw.

LIFs, LRIFs, and RLIFs provide you access to income for life while your money grows tax deferred and offer you a choice of investment options. Money in a LIF, LRIF, or RLIF must last you for the rest of your life, which is why you may not withdraw it in a lump sum. It’s also why you can’t withdraw more than the maximum authorized for each year. Depending on the province in which you earned the money, it might be subject to other rules. 

Create a plan to take out your income in retirement 

Putting together a plan for your income in retirement may get a little complex, especially if you have many different savings accounts. There are rules to keep track of, taxes to calculate, and budgets to cover. You can certainly do it on your own, but you also may want to work with a tax professional or financial advisor for help determining what’s right for you and your plans for retirement.

Some questions you may have

Can I convert an RRSP to an annuity instead of an RRIF?

Yes, you can convert registered or non-registered savings to an annuity. Annuities vary in how they pay your benefit and for how long, so it’s important to understand the differences and what they mean for you and your beneficiaries. Read more about annuities.

When an RRSP is transferred to an RRIF, am I taxed on the transfer?

If you do a direct transfer from an RRSP or an RRIF to another RRIF, you don’t pay tax on the amount you transferred. You can’t put in any new money that isn’t already in a registered plan. Once the money is in the RRIF, withdrawals from it are taxable income. Read more about transferring to your RRIF.

Does part-time work (before and/or during retirement) affect CPP/QPP and OAS?

For OAS, part-time work could have an impact if it makes your income too high. Your OAS pension could then be partially reduced (clawed back) or even cancelled. Read more about the clawback threshold. 

For CPP/QPP, working while receiving your pension can increase your benefit if you make additional CPP/QPP contributions. If you're between 60 and 65, you and your employer must continue to contribute to CPP/QPP. If you're over 65, you can opt out of CPP contributions (but not QPP for Quebec residents). Any contributions made after the pension has started will increase the annual pension benefit. 

Do CPP/QPP benefits get reduced if I have other income sources?

No, they don’t. CPP/QPP are employment based, so they’re not subject to clawback. 

When should I start CPP/QPP and OAS?

The standard age for starting the CPP/QPP is 65 to get the full benefit, but you can start as early as age 60 or wait as long as age 70. Something to consider is that if you take it earlier, you’ll get less. If you take it later, you’ll get more.

• If you start at age 65, you’ll get your full CPP/QPP benefit. 
• If you start at an earlier age, your benefit is reduced by 0.6% for every month prior to your 65^th birthday, or 7.2% less for every year before you’re 65.
• If you start after age 65, your benefit is increased by 0.7% for every month after your 65^th birthday, or 8.4% more for every year after you turn 65.

You can start your OAS pension at age 65 or any time until you turn 70.¹ If you delay taking OAS, your monthly payments will be higher—7.2% more each year that you delay taking OAS, up to a maximum of 36.0%.

If I leave Canada, can I still collect CPP/QPP and OAS?  

You can qualify to receive OAS payments while living outside of Canada if one of these conditions applies to you: 

1 you lived in Canada for at least 20 years after turning 18, or 

2 you lived and worked in a country that has a Social Security agreement with Canada. 

If you lived and worked in Canada and in another country, you may qualify to receive both a CPP/QPP retirement pension and a pension from the other country. Canada has international Social Security agreements with a number of countries.

What should I withdraw from first: CPP/QPP, OAS, RRIF, LIF, TFSA, or NRSP?

There’s no one-size-fits-all answer to this question. It depends on so many factors, such as when you want to retire and whether you want to continue working while easing into your new lifestyle. Also consider your plans: Will they include travel? A new business? Taking courses? Think of anything that will cost money or make money. This will help you figure out how much money you’ll need at each stage of your life in retirement and where to draw it from. This is a great discussion to have with your advisor.

1 "CPP retirement pension: When to start your pension," canada.ca; Retraite Québec: "When should you apply for a retirement pension under the Québec Pension Plan?" gouv.qc.ca; OAS: "Old Age Security: How much you could receive," canada.ca.