Otober 2020 issue

5 factors to consider before applying for a retirement pension under the Québec Pension Plan

Finally, retirement is approaching! You have been waiting and dreaming about it for a long time, but you must be well prepared to fully enjoy it! The way we retire has changed over that last few years. Some people choose phased retirement, others choose to change jobs at the end of their career, some even choose to fully retire. In addition, applying for a retirement pension under the Québec Pension Plan (QPP) at age 60,  65 or 70 does not mean that you must fully retire.

One of the advantages of the QPP is that it provides a certain level of flexibility with respect to the age at which you can apply for a retirement pension. You can apply to receive it at age 60. If you decide to apply for your pension at that age, the amount will be lower than if you postpone applying until age 65. You could also decide to apply at age 70 and benefit from an increased amount that will be even higher than if you had applied at age 65. Whatever your decision, it will have an impact on your retirement income for the rest of your life. Therefore, this merits careful consideration!

But, which is the best solution for you?

In some cases, the best solution is to apply for a retirement pension at age 60, whilst in other cases, it is premature and disadvantageous to apply so early. To help you make the best decision, Retraite Québec identified 5 factors you must consider in order to determine at what age you should apply for a retirement pension under the Québec Pension Plan:

1 - Sufficient income once you retire

Once you leave the labor force, will your income be sufficient enough for the rest of your life? If not, it is better to postpone when you leave the labour force and when you apply for your retirement pension under the QPP until you are sure that your financial assets or your pensions are sufficient to meet your needs for the rest of your life. Think about it, you could be retired for 30 years

2 - State of health

If you are in good health, have healthy life habits and do not have any hereditary predisposition that could reduce your life expectancy, you would benefit, in most cases, from postponing your application for a retirement pension under the QPP. On the other hand, if you have health problems that reduce your life expectancy, you would benefit from applying for your pension at an earlier age.

3 - The impact of your retirement pension on your taxes

Taxation has a significant impact on your income. For example, the taxes you will have to pay on your employment earnings could be higher if you receive your retirement pension and continue working (higher marginal tax rate). This could reduce the net income that you will receive from working.

4 - Personal retirement savings (RRSP, VRSP, TFSA, etc.)

If you have personal retirement savings (RRSP, VRSP or TFSA), it could be wise to postpone your application for a retirement pension under the QPP. Your personal retirement savings could be used to meet your needs during the first months or years of your retirement, before receiving your pension under the QPP. By waiting longer, you will obtain an increased amount and you will increase, for the rest of your life, the part of your future income, which is for life, guaranteed and fully indexed based on inflation.

5 - The interrelation between the different public programs

In certain situations, it could be advantageous to apply for your retirement pension under the QPP earlier, even if it reduces the amount of the pension. For example, you could be eligible for the Guaranteed Income Supplement (GIS) offered by the Government of Canada if your income is lower. Therefore, even if your pension amount is reduced, part of the reduction will be compensated by the GIS and the amount of income you will receive could be higher.

As you can see, it is very important to think it through before applying for a retirement pension under the QPP. It is also very important to think about it, because the age at which you begin receiving your retirement pension has an impact on the financial risks that you will face for the rest of your life (longevity, inflation, return and liquidity).

Furthermore, the decision you make should be taken into account in your retirement withdrawal strategy. Since the decision to apply for a retirement pension under the QPP is irreversible, you must ensure that your income will be sufficient during your entire retirement.

Be sure to consult a financial planner to evaluate when the best time is to apply for your retirement pension and use the SimulR tool. The tool will allow you to find out the amount of  your retirement pension under the QPP at various ages.

It will also give you an idea of the savings that you should accumulate in order to meet your needs in retirement.

To find out more

Factors to consider before applying for your retirement pension This link will open in a new window.

Summary