Returning to work after retirement? Tips to help you plan ahead

Whether you’re considering returning to work for the financial or social benefits or to exercise your brain, there are important factors to consider before making your decision.

How returning to work can impact your pension

First, it’s important to understand how your re-employment earnings can impact your PSPP pension.

If you return to work for a PSPP employer and you don’t rejoin the Plan, there are limits on the amount you can be paid in any calendar quarter before your pension is affected. This is referred to as the “quarterly re-employment earnings limit.” This means that, if your gross earnings in any calendar quarter exceed your quarterly re-employment earnings limit, you’ll need to repay OPB a portion, or all, of your pension for that time. We refer to the amount you must repay as a “pension overpayment.” Keep in mind that not all rules apply to all groups. Confirm your quarterly earnings limit by reviewing your Confirmation Statement that you received when you retired. You can also check the letter you received when you turned 65.

Budgeting

It is important to know what your expenses are in retirement, so you know whether your income is adequate. Write down your current expenses to determine whether you should reduce the amount of income that you intend to withdraw from your savings or reduce your expenses if your budget indicates that you have a deficit. Having more incoming cash (such as your salary or pension) than outgoing cash (expenses) not only gives you a healthier financial picture, but it provides a buffer in case of unexpected expenses that can arise in retirement.

Strategies to reduce your taxable income

If you decide to return to work while collecting your PSPP pension, depending on the impact of the re-employment earnings rules mentioned above, your taxable income may increase. Below are some strategies to consider:

1. Pension splitting and tax credits - Your PSPP pension can be split with your spouse at any age. This can help to reduce your taxable income. The pension income tax credit (Line 31400(opens in a new tab)) can be used by a spouse with a pension, irrespective of whether it’s the spouse’s own pension income or as a result of pension splitting.

*Members receiving Retirement Compensation Arrangement benefits are eligible for pension income splitting, provided certain conditions are met, including that the retired member is at least age 65.

2. Canada Pension Plan (CPP) - One option to help reduce your taxable income while working is to delay collecting your CPP pension. The normal age to receive the CPP pension is 65; however, the CPP pension can be taken as early as age 60 or as late as age 70. This will allow you to control the amount of income you receive and, more importantly, lower your taxable income.

If you choose to delay your CPP pension until after age 65, your CPP entitlement will be higher than it would be before age 65. Learn more by reading our article on your pension and CPP integration.

Your CPP pension is reduced by 0.6% per month if you decide to take it before age 65 and is increased by 0.7% per month if you delay after age 65. For example, if you were to take your CPP at age 62, your monthly CPP pension would be reduced by 21.6% (0.6% X 36 months before age 65). Alternatively, if you chose to delay collecting your CPP to age 67, then your monthly CPP pension would be 16.8% higher (0.7% X 24 months past age 65). To find out your CPP entitlement, contact Service Canada(opens in a new tab) and they can provide you with an estimate of your CPP entitlement at ages 60, 65 and 70.

Also, keep in mind that when returning to work and earning a salary, you may be required to make CPP contributions depending on your age.

3. Old Age Security (OAS) – If you are 65 years of age or older and eligible, you can apply to receive an OAS pension. You can delay receiving OAS as late as age 70. Your OAS pension will be higher depending on how long you delay beyond age 65. Choosing to delay your OAS pension can help reduce your taxable income while you are also earning a salary and, if applicable, your PSPP pension.

The OAS pension is increased by 0.6% per month after age 65. For example, if you were to start collecting your OAS pension at age 67, your monthly benefit would be 14.4% higher than your OAS entitlement had you started collecting it age 65.

It’s important to note that if you decide to receive your OAS pension while earning a salary, some or all of the OAS pension may be clawed back if your net income exceeds certain thresholds. Avoiding this recovery tax can be another benefit of deferring OAS. To learn more about the thresholds, speak with your financial advisor.

4. Registered Retirement Income Fund (RRIF) income - Another strategy to reduce your taxable income when you return to work is to delay receiving your RRIF income. If you hold investments in Registered Retirement Savings Plans (RRSPs), the account must be converted into RRIFs, annuity, or lump-sum cash payment by December 31 in the year when you turn 71. If you convert a RRSP to a RRIF, you must start to withdraw your minimum RRIF income no later than December 31 of the following year.

When you withdraw the minimum RRIF income, your financial institution is not obliged to withhold taxes and as a result, you may owe taxes when you file at the end of the year. Projecting your tax liability early in the year enables you to set aside the funds that will be due to Canada Revenue Agency. You may also request that your financial institution withhold additional taxes to make up the difference. If you are 65 or older, consider splitting your RRIF income with your spouse to help reduce your taxable income. To learn more, discuss with your financial advisor.

Revisit your plan regularly

As we experience retirement and navigate through changes in our life, having a flexible plan is key. A good policy is to revisit your plan once or twice per year. This will enable you to examine your income needs, plan accordingly and adjust. This is especially true for larger and unplanned expenses that may pop up in retirement. Creating and maintaining a flexible, balanced plan, and reviewing your budget regularly will allow you to determine how much longer you may want or need to work for, while allowing you to enjoy your retirement.