A recent study from the C.D. Howe Institute, Who Loses Most? The Impact of Taxes and Transfers on Retirement Incomes, finds that seniors with lower incomes are significantly affected by taxes on government benefit programs such as the Canada/Quebec Pension Plan (CPP/QPP) and the Guaranteed Income Supplement. This effect is more pronounced in Western provinces. The marginal effective tax rate for low-income seniors is highly punitive, especially considering the lower amount of income they receive in the first place.
The study goes on to state that the high marginal tax rate essentially means that lower income wage earners may do better investing in non-registered savings such as Tax Free Savings Accounts rather than registered vehicles such as RRSPs for their retirement plans.
Saskatchewan is particularly hard-hit by high marginal effective tax rates on CPP. About 25 per cent of Saskatchewan’s single seniors are hit with an all-in effective tax rate of over 100 per cent, which means that they would have been better off not paying into CPP at all.
New Ontario Pension Plan May Not be Different From CPP – Study
The study goes on to examine the newly introduced Ontario Retirement Pension Plan (ORPP) which is meant for workers who do not have access to a pension plan at work. The study crunches some numbers and concludes that lower-income Ontario seniors saving for retirement would be better off putting money into non-registered plans such as TFSAs than the new ORPP.
Confused? Talk to your financial planner
The findings of the study are certainly worth considering. Although the study was meant to inform policy making on benefits taxation at the federal and provincial levels, its findings have some large implications for Canadian seniors – or those who will be seniors one day. Talk to your financial planner about the best plan for your retirement.
Reverse mortgages can help fill the gap
If you will be retiring shortly and are concerned about the implications of taxation rates on your investment vehicles and benefits, consider a reverse mortgage to add a little air into your retirement plan’s tires. You can access up to 50% of your home’s equity with the CHIP Home Income plan and not have to make any payments until your home is sold. In addition, these funds are tax free.
Contact Horizon Equity to find out more about how a reverse mortgage can round out your retirement plan.