If you live to age 95, your retirement could last 30 to 35 years. Maintaining your standard of living during this period will require various sources of income. Quebec workers have a significant social safety net, thanks to two public pensions: the Quebec Pension Plan (QPP) and the Old Age Security (OAS) pension. To maximize your retirement income, it’s important to understand how they work.
Old Age Security (OAS) pension
The OAS is a public pension administered by the Government of Canada and available to all Canadian residents at age 651. This federal indexed benefit was $691 a month for the first quarter of 2023, or $8,2922 a year . This amount increases by 10% at age 75.
It may be wise to delay the payment of your benefits until age 70. For every month of deferral, the benefit increases by 0.6%3. If you postpone your application until age 70, your annual base amount could be $11,277 for 2023. To optimize your pensions, however, you must ensure your income does not exceed $86,912 (2023). For any income above this threshold, the OAS pension is reduced by 0.15%. The threshold should be taken into account if you plan to sell assets or will have earned income between the ages of 65 and 70.
Quebec Pension Plan (QPP)
The QPP is a public plan administered by the Government of Quebec. Unlike the OAS pension, the QPP is contributory. The benefits you receive are linked directly to the amounts contributed during your lifetime.
The contributions are mandatory and are shared with the employer. For employees, they are deducted at source. With each paycheque, the worker and the employer each contribute 6.4% of the maximum pensionable earnings (MPE), which are $66,600 in 2023. Self-employed workers must pay both parts of the contribution, for a total of 12.8%. In both cases, no contribution is payable on income exceeding the MPE.
The purpose of the QPP is to provide indexed income replacement until your death, with the maximum being 25 to 33% of the MPE, depending on your year of birth. The amount paid out depends on two factors: the contributions made during your lifetime and the age at which you start collecting the QPP.
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Contributions Age at which you start receiving the QPP |
QPP enhancement in progress
Will you be entitled to a maximum of 25% or 33% of the MPE? It depends on your year of birth. Since 2019, significant changes have been made to the QPP to increase the amount of the pension.
The maximum QPP amount will gradually increase from 25% of your MPE to 33%. Workers on the verge of retirement will see little or no benefit from this change, but for younger generations the difference could be substantial.
Public pensions: Sufficient or not?
As always, the answer depends on your desired standard of living and your forecast expenses in retirement. Unless you live very frugally, the OAS and the QPP will probably be insufficient. Let’s take the example of a 65-year-old engineer who, in 2023, is entitled to the maximum OAS and QPP benefits. His salary is $80,000 and he’s aiming to replace 60% of that income.
| Pensions | Age 65 | Age 70 |
|---|---|---|
| Old Age Security pension | ||
| Old Age Security pension | $8,250.72 | $11,220.96 |
| Quebec Pension Plan | ||
| Quebec Pension Plan | $15,678.84 | $22,263.96 |
| Total pensions | ||
| Total pensions | $23,929.56 | $33,484.92 |
| Income budget | Age 65 | Age 70 |
|---|---|---|
| Desired income | ||
| Desired income | $48,000.00 | $48,00000 |
| Pension | ||
| Pension | $23,929.56 | $33,484.92 |
| Shortfall | ||
| Shortfall | $24,070.44 | $14,515.08 |
Public pensions won’t be enough to finance our engineer’s desired standard of living. If he starts receiving his pensions at age 65, they’ll provide only 43% of his desired income. If he defers them until age 70, they’ll provide 59%. That amount is better but still inadequate. In addition, by postponing them until age 70, he’ll have to make up the shortfall over five years if he still wants to retire at age 65.
Unless he is a member of an employer’s pension fund, our future retiree will need nearly $472,000 in his RRSP5 to make up the shortfall if he wants to receive his public pensions at age 65. As a result of the QPP enhancement, the younger generations can expect better coverage; but, without personal savings, they too will have difficulty maintaining their lifestyle.
Importance of sound financial planning
Public pensions are an integral part of your retirement plan. The amounts you’ll be entitled to and when you start collecting them will have a major impact on your retirement age and savings goals.
There are so many variables that calculating the possible scenarios can be difficult. Seeking guidance and advice from qualified people can help you make informed financial decisions.
Careful financial planning also includes a long-term investment strategy. The earlier you start investing, the more flexibility you’ll have when it comes to choosing your retirement plan and collecting your pensions.
Do you have that latitude?
