When it comes to retirement income, RRSPs are only one slice of a much bigger pie. Clients may not be aware of the various sources of income available to them in retirement, so ensuring that they understand the different tiers of Canada’s retirement income system and how they interact is essential.

“Clients have to start considering where their retirement income is coming from, and over what period they’re going to need it to understand the different alternatives they have,” says Ian Burns, financial and estate specialist for Mississauga, Ont.-based Investment Planning Counsel.

The system has three tiers. The first is the basic old-age security; the second is the earnings-related Canada Pension Plan (or Quebec Pension Plan for those who live and work in Quebec); and the third is private pensions and savings. Here’s a closer look:

> The First Tier. Programs in this part of the retirement income system include the OAS, the guaranteed income supplement, as well as the “allowance” for low-income people. The programs in this tier are funded by Ottawa’s general tax revenue and, as with all public pension programs, clients need to apply for the benefits.

The OAS is available to all Canadians who are 65 or over and have resided in Canada for at least 10 years since the age of 18. The amount of their pension is determined by how long they have lived in Canada. In October, the maximum monthly benefit was $502.

The GIS is a monthly benefit paid to those who receive an OAS pension and have little or no additional income. Applicants have to apply yearly and the amount they receive is based on their previous year’s income. A GIS applicant’s annual income — excluding the OAS — cannot exceed $15,240; for a couple, the combined income of the applicant and spouse/common-law partner over age 65 cannot exceed $20,112. The maximum monthly benefit for a single person is $634 and for a couple $418 a person for a total of $836.

The final program, the “allowance,” is designed for those who find themselves in difficult financial circumstances due to the death of their spouse/common-law partner or for those who are partners of low-income pensioners. It currently pays out a maximum benefit of $921 (or $1,020 for survivors) monthly.

Applicants must be between 60 and 64 and must have lived in Canada for at least 10 years since the age of 18. The “allowance” ends when the applicant becomes eligible for the OAS pension at 65.

> The Second Tier. Individuals who are employed in Canada and earn more than $3,500 a year contribute to the CPP/QPP. This includes self-employed individuals, making them eligible for the monthly benefit.

The amount clients contribute to the plan is based on their annual earnings, from $3,500 to a maximum of $43,700.

The CPP uses clients’ contributions to determine whether they or their families are eligible for a benefit and the amount of that benefit. This takes into consideration how long and how much clients have contributed. Normally, the more they earn and contribute to the CPP over the years, the higher the benefit will be, as they have built up more CPP pension credits. The maximum monthly benefit is roughly $863.

The CPP also provides benefits to contributors and their dependent children if they become disabled, or to the surviving partners and dependent children upon the contributors’ death.

> The Third Tier. This consists of private pension plans and savings. The trend today is for companies to move away from defined-benefit plans and move into defined-contribution plans, says Burns.

“What they are really doing is taking the liability away from the company and putting it on the shoulders of the retiree,” he says. “It is even more important today to understand the ins and outs of the pension plan well before retirement.”

In a DB plan, the pension amount will represent a percentage of a client’s earnings for each year of service, whereas a DC plan consists of contributions made by both the client and the employer to a fund from which the pension will be paid. Unlike a DB pension, there is no guarantee as to the amount of the benefit in a DC plan. Employees should review their annual pension statements and discuss the options available for them upon retirement.

@page_break@In addition, clients can save for their own retirements through RRSP contributions.

“You want to picture your income flow as a tap and there is a reservoir that contains a mixture of these three frameworks,” says Burns. “The idea is to turn these taps on to make sure they are tax efficient. We want to know exactly where we are going and how much money we are taking out of pensions down the line.” IE