Phased retirement

Proposed federal budget change would allow older employees to start drawing pensions while still working. As pointed out by financial author Gordon Pape in the August issue of CARP magazine, an important federal budget change this year was the introduction of phased retirement for Canadians:

“In the past, it was illegal to collect an employer pension and accumulate future benefits while you were still working. Not any more, assuming passage of the budget bill. In future, employers will be able to pay up to 60 per cent of an employee’s accrued pension benefits while the person is still working, as long as he/she is at least 55 years old. There is no limit on the number of hours worked nor on the salary the employee receives. Employees will be allowed to continue to contribute to the pension plan, thereby accruing more benefits for the future.

The implications of this move are huge, especially coming at a time when governments continue to eliminate mandatory retirement and demographers are increasingly concerned about labour shortages in the future as the baby boomers hit 65. Now people will be able to start drawing pensions while gradually reducing their work week – or even stay on the job full-time if they want. The possibilities for creative use of this opportunity are endless.” CARP tracked down the status of this budget item, and has been told by an official in the Tax Policy Branch of Finance Canada that:

“The Income Tax Regulations currently prohibit employees from accruing pension benefits under a defined benefit Registered Pension Plan (RPP) if they are receiving a pension from the plan or from another defined benefit RPP of the employer or a related employer. This rule prevents employers from offering phased retirement programs that would permit older workers to continue working, while at the same time receiving a partial pension and accruing further pension benefits in respect of their part-time work. It also prevents employers from paying a partial pension to older workers to increase the reward from full-time work, if the worker continues to accrue pension benefits.

To provide more flexibility to employers to offer phased retirement programs, and to increase the reward to older workers from full-time work, Budget 2007 proposes to amend the Income Tax Regulations to allow an employee to receive pension benefits from a defined benefit RPP and simultaneously accrue further benefits, subject to certain constraints.

Specifically, the new regulations will allow employers to offer qualifying employees up to 60 per cent of their accrued defined benefit pension, while accruing additional pension benefits on a current service basis in respect of their post-pension commencement employment. To ensure that this measure has a positive impact on labour supply, qualifying employees will be limited to employees who are at least 55 years of age and who are otherwise eligible to receive a pension without the plan imposing an early retirement reduction. The 60-per-cent limit will be based on the amount of pension benefits (including bridging benefits) that would be paid from the plan if the employee were fully retired.