After the loss of a spouse, widows/ers may be shocked at the CPP survivor benefit they will receive and the impact on their retirement income.
My personal situation:
After becoming a widow, I was shocked to learn how CPP survivor benefits are calculated and how little the benefit will contribute to my retirement.
Mary died on January 15th, 2020, at the age of 57 and I was 58 (Note: the surviving spouse’s age is important when calculating CPP survival benefit). She was mostly a stay at home mom, raising our three children, volunteering at school events, driving kids to/from after-school activities and basically taking care of our family needs.
She trained as an accountant and when our children were old enough to attend school full time, she landed a part-time job with a local accountant and assisted on various bookkeeping engagements. Her employment was sporadic and rarely made maximum annual CPP contributions, but she did contribute almost her entire working career.
So I expected a lower CPP survivor pension but what I received was shocking. It turns out that my monthly CPP survivor benefit as a widower is $547.01 or $6,564.12 p.a. (plus inflation protection). Note the maximum in 2021 is $1,203.75 or $14,445 p.a.
Why was I shocked at the CPP survivor benefit — part one
I assumed we would both work until 65 and live to 90. I was shocked because our retirement plan assumed Mary and I would both work until 65, and after a fulfilled retirement, we’d die at 90. I also assumed that I’d be eligible for 100% of my CPP benefit and Mary would receive 75% of her benefit.
In short, our retirement plan included a combined annual CPP payment of $25,278 (along with an annual inflation adjustment.) Sadly, Mary didn’t work until 65 nor did she survive until 90 hence, I had overestimated the combined CPP we were entitled to receive.
But it gets worse…
According to the Government of Canada’s website, CPP survivor pension is based on my age when Mary died. The website has two age groups:
If you are age 65 or older
You will receive 60% of the contributor’s retirement pension, if you are not receiving any other CPP benefits.
If you are under age 65
You will receive a flat rate portion and 37.5% of the contributor’s retirement pension, if you are not receiving any other CPP benefits.
Thus, in my case, my flat rate portion is $197.34 plus 37.5% of Mary’s CPP benefit, which equates to $547.01 per month. No where near the expected $902.83 p.m. that I had estimated in our financial plan. I received my first CPP survivor benefit in February, 2020 ($547.01) and will continue to receive the reduced payment (plus inflation) until I start collecting my own CPP.
Why was I shocked at the CPP survivor benefit — part two
I assumed the deceased spouse’s CPP would be added to the surviving spouse’s CPP. I was wrong again and I overestimated our combined CPP entitlement. If you keep reading the rules, you will read, “The most that can be paid to a person who is eligible for the retirement pension and the survivor’s pension is the maximum retirement pension.”
What does this mean?
It means that the maximum CPP benefit allowed is $14,445 p.a. (in 2021) and stacking CPP survivor benefit and/or the CPP disability benefit over this amount is not permitted.
Allow me to summarize my new retirement reality as a widower planning for his retirement:
My retirement plan estimated combined CPP at 65 as $25,278 p.a. but as a widower who is already at the maximum CPP benefit, my CPP at retirement (65 years) is now estimated at only $14,445 p.a. — a 43% reduction in annual CPP income — OUCH!
But, there are more surprises for widows/ers at retirement:
1. A widower may only collect one Old Age Security (OAS) benefit.
Again, my retirement plan assumed we would both receive the maximum OAS from the age of 65. Today the maximum OAS is $626.49 p.m., so I assumed we would receive $15,035.76 p.a. However, widows/ers are not entitled to their late spouse’s OAS, so my retirement strategy now must plan for an OAS of $626.49 per month — a 50% reduction in annual OAS income — double Ouch!
2. Combine RRSPs and face possible OAS clawback when withdrawing funds.
As a widower, I’m entitled to a tax-free rollover of Mary’s RRSP into my plan. This is a great tax deferral opportunity but has one major unintended consequence. When I begin withdrawing RRIF payments, my retirement income will be higher because I’m withdrawing two minimum RRIF withdrawals (mine and Mary’s), so I’ll be subjected to the OAS clawback, which starts at incomes over $79,000 and is completely lost when net income surpasses $129,581. Given my retirement net income, I expected to have lost most of my OAS, however, if Mary had been alive, we could have split our pension income and avoided most, if not all of the OAS clawback.
3. My retirement income as a widower has now dropped significantly:
Total annual loss as a retired widow: $25,857 per year. If I live to the age of 90, my lost retirement income will be $672,282.
On the plus side
While the pluses are minimal, it would be remiss of me to ignore them. There are additional benefits that can be claimed, if you or your children meet specific criteria.
1. Benefits for children under 25
The Canada Pension Plan (CPP) children’s benefits provide monthly payments to the dependent children of disabled or deceased CPP contributors. In my case, since my daughter is 19 years old and a full-time student, she will receive a benefit of $257.58 p.m. until she turns 25 or ceases to be considered a full time student.
2. Death Benefit
Under certain conditions, the estate will receive a one-time death benefit of $2,500.
3. Allowance for survivors
A non-taxable benefit available to low-income seniors between the ages of 60 and 64 whose spouse or common-law partner has died and their income is below $25,560.
Additional points of interest
1. A widow/er can only receive one survivor’s pension, even if they had outlived multiple spouses. Hence, the widow/er will be paid on whichever benefit is largest.
2. A widow doesn’t lose survivor’s benefit if they remarry.
3. If a widow already receives other CPP benefits (e.g. a CPP disability pension), all pension benefits are combined and paid in one-single monthly payment.
4. The maximum total CPP benefit a widow/er receives, if receiving both the survivor’s pension and other CPP benefits, is the maximum retirement pension, which is $1,203.75 p.m. for 2021. No doubling up!
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Final thoughts
After the loss of a spouse, a widow/er may face a significant drop in CPP and OAS benefits in their retirement years. They may face a situation where they receive less income and pay higher tax. Yet his/her expenses such as property taxes and utilities may keep rising even after the death of a spouse. A widow/er may need to rely more heavily on their RRSP and TFSA to close the gap caused by the reduction in CPP and OAS, which will actually have a negative effect on their OAS.
The best time to compensate for a possible reduction in expected CPP and OAS is before either spouse dies. A financial planner may run “what if” scenarios and determine if the surviving spouse can/cannot maintain their lifestyle after the death of their spouse. As Pal Di Iulio, associate editor of Panoram Italia says in my podcast interview, “we shouldn’t be waiting until our 70s or 80s to think about our long-term medical, financial and quality-of-life needs.” So a solution for any shortfall — predicted or immediate — may be life insurance or a deferred annuity.
I realize this advice is like saying the best time to plant a tree was 30 years ago… and the second-best time to plant a tree is today. But, if you didn’t plan or made the wrong assumptions (like I did), then today is the second best day to understand and prepare for your scenario.
If you are newly widowed and not sure how much CPP and OAS income you’ll receive OR you have been wondering if you should claim your CPP and OAS early (before 65) or defer until age 70, please give our office a call and we can discuss your options.
Finally, if you have any goal in mind — big or small — that requires some financial planning, but you’re struggling with where to start, reach out to our team. We have the expertise and life experiences to help guide you to achieving your goals.
Contact us today to learn more about the options available to you. CLICK HERE.
Service Canada form
Some of the forms you may be required to complete include:
- Survivor’s pension: CPP survivor’s pension and children’s benefits application for (ISP-1300)
- Children’s benefits: Under 18 (ISP-1300) and Over 18 years (ISP-1400)
- Death benefit: ISP-1200 form
- Allowance for the Survivor: Form ISP-3008
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