Low-income retirement plans

When it comes to people with low income, the regular rules of retirement planning don’t apply. That’s because their income is likely to go up when they retire, instead of down.

I recently attended a seminar given by John Stapleton, a writer, instructor and Innovations Fellow with the charitable Metcalf Foundation. It was on low-income retirement planning and it was a real eye-opener. According to Stapleton, when it comes to people with low income the regular rules of retirement planning are all wrong. That’s because their income is likely to go up when they retire, instead of down as it will for most middle- and high-income earners, because they will probably start to receive money at 65 that they didn’t get before that age, including Old Age Security (OAS), the Canada Pension Plan (CPP) and possibly the Guaranteed Income Supplement (GIS).

One of the key messages Stapleton focuses on is maximizing the federal GIS. The GIS is a tax-free monthly benefit paid to people at age 65 (or age 60 for widow(er)s or those married to a GIS recipient over 65) who have a low or modest income besides OAS. To receive it you must be 65 (sometimes 60), have a low income and qualify for OAS. Currently the GIS must be applied for, although the government has recently been phasing in proactive enrolment for both OAS and GIS.

Note that the income limits in the table below apply to seniors who qualify for the full OAS. This means that they must have lived in Canada for at least 40 of the 47 years between their 18th and 65th birthdays. You can get partial OAS if you have lived fewer years in Canada and in this case, the income limits may be higher. Low-income people who get partial OAS should also apply for GIS as they may get extra GIS benefits to make up for their partial OAS pension.

For January, February and March 2017, the maximum combined monthly payment from OAS and GIS for a single, widowed or divorced pensioner is $1,442.62. That’s $578.53 from OAS and $864.09 from GIS. The maximum is reached if there is no income other than OAS and GIS. The problem is that the GIS is reduced by 50% of any other income you receive (in some cases the rate is 75% or 100% when you include provincial clawbacks).

GIS Qualification Levels chart

Stapleton has a few recommendations for low-income seniors:

Don’t invest in RRSPs. When you are paying little or no tax, there is little or no tax benefit to making an RRSP contribution. Low-income earners also often have non-taxable income before age 65, such as social assistance and insurance settlements, versus taxable income after 65 (OAS, CPP, RRSP, etc.). This dynamic does not suit RRSPs well. Furthermore, for every dollar of RRSP and RRIF withdrawals, GIS is reduced by at least 50¢.

Elect to receive CPP at age 60 . One advantage to electing early is that people will start to receive money early, and for low-income earners, every dollar counts. Another benefit is that the CPP income at age 65, when GIS starts, will be lower than if people waited to start their CPP at 65. That means less income that could result in GIS clawback. Stapleton recommends that low-income seniors who are making RRSP contributions stop doing so and consider liquidating their RRSPs.

Use tax-free savings accounts. Neither income earned in a TFSA nor withdrawals from one will impact eligibility for federal income-tested benefits and credits such as the GIS and the Canada child tax benefit.

When an RRSP might make sense. What if your net income is slightly too high to qualify for the GIS? In this case, you should consider making an RRSP contribution to reduce your income under the GIS limit. Many seniors assume they can’t make RRSP contributions after age 65, but as long as they have RRSP room they can contribute up to the year they turn 71. It might make sense for them to borrow to make RRSP contributions from age 65 to 71 as the increased non-taxable GIS and RRIF payments after age 71 would more than cover any interest on the loan and tax on the withdrawals.

According to Statistics Canada, of the 5,751,577 people who were collecting OAS in June 2016, 1,883,917 were also collecting GIS. That means that 33% of seniors make less than the limits to be eligible for GIS and are therefore in the low-income category. For these thousands of people, maximizing their GIS and reducing their taxes is of paramount importance.

Stapleton currently devotes his time spreading the word about effective retirement planning for low-income people and has a website on the issues (openpolicyontario.com/retiring-on- a-low-income-3). If you know someone with a low income, why not try to help out by bringing up these issues with him or her?