Almost all pension planning articles seem based on the assumption that both partners in a relationship, married or common law, will live to an incredibly old age, happily or not. That’s not reality, however. In fact, according to 52 Ways to Wreck Your Retirement: …And How to Rescue It “the average age for widowhood in Canada is 56.”
56.
I never would have guessed that number and I doubt many others would have either.
For those who lose their partner before 65 this could make a huge difference to their financial future. Instead of two people living together pooling their pensions and resources for many years there will be only one. And perhaps more distressingly, if the person dies young, there may be a number of years lost when it was expected they would boost their RRSP savings and pension earnings. Many people don’t really save significant amounts until they are in their fifties. Most Defined Benefit pensions are calculated based on the number of years of service and the highest earning years: both of which will probably be reduced if a person dies young.
Others may lose their partner almost immediately after retirement. One of our closest relatives was diagnosed with a fatal illness at 64 and was gone by 67. Her husband lived another 11 years without her. While the death of a partner just after retirement may not reduce planned savings or pension entitlements, it can still have a severe impact on the surviving partner’s income.
CPP Is Not Directly Payable to a Surviving Spouse
Many people haven’t given much thought to how CPP works. When they estimate their retirement income, they simply add the expected CPP payment for both spouses. But when one spouse dies, the other is only entitled to CPP Survivor Benefits, not the deceased person’s full CPP payment.
The combined CPP payment to any person is limited to the maximum CPP monthly payment based on the maximum that second person was entitled to when they retired. (The monthly maximum is adjusted frequently but only applies to people who are just beginning to get CPP. For someone already receiving CPP their monthly maximum was set the day they started receiving CPP and is only increased by an inflation adjustment. So the maximum is based on the maximum at the time the second person in the couple retired.)
Imagine a man retires and begins receiving the maximum personal CPP monthly payment. Unfortunately, soon after his wife, who began receiving CPP before him, dies. The husband will not get ANY additional CPP! There is a death benefit of up to $2500 to help defray some of the costs of the funeral but that is all. And that benefit is fully taxable as income to the recipient or to the estate, so in reality it may be worth $2000 or less after tax.
In another case, imagine a woman retires and begins receiving one third of the maximum CPP monthly payment. Her husband retires after her and receives the maximum CPP monthly payment. If he dies, she will begin to receive at MOST the maximum CPP monthly payment only. She will not receive his maximum plus her one third. She will receive 60% of his payment plus her payment, up to a maximum of his maximum CPP monthly payment. Her CPP income will likely only be about 75% or less of what their joint CPP income used to be.
The Toronto Star recently reported on this issue. In their article they interviewed a man who was surprised to discover that when his wife died, his own CPP payment only increased by $22.75, even though his wife’s CPP monthly payment had been $1053.
For CPP planning, it’s probably best to estimate your survivor benefits as conservatively as possible. In general, you should assume you would only receive 60% of what your partner was receiving, added to your own CPP payment, but capped at a maximum value of 100% of what your maximum monthly CPP payment is or will be. If that’s too complicated, assume you will get nothing from CPP if your spouse dies. It’s better to plan on receiving too little money than too much.
Defined Benefit Pension Plan Benefits May Also Be Lost
Most defined benefit pension plans also limit the amount paid to a surviving spouse or partner. A common amount is 60% of the original payment. However the actual amount can range from 0 to 100%.
The only way to know what you might receive from your partner’s DB pension is to look it up. In fact, you may even have to check it annually as the terms of the plan may change from year to year.
I know when a friend took early retirement, not really be choice, the friend was asked to choose what percentage of their pension would go to their spouse if they died. If they chose 60%, the monthly amount they would receive before death would be significantly lower than if they chose 0%. This friend was then left trying to decide who was more likely to die first! That’s a terrible decision to have to make and a dangerous one as many of us don’t have any way of knowing what the future holds.
Defined Contribution Pension Plan Benefits Vary for Survivors
Defined contribution pension plans have varying rules if a person dies before retirement. Some simply turn over the entire account to the surviving spouse as a locked-in RRSP-type of investment. Others give the survivor 60% of the value of the plan. There is no “one” answer. Again, you would have to check the rules for the specific plan your partner or spouse is enrolled in.
DC pensions also have different rules for what happens if a person dies after they retire. You will have to check these rules with whomever administers the plan. Some DC pensions, for instance, are used to buy an annuity type of product when the person retires. The terms of the annuity may include a guaranteed minimum number of payments with the beneficiary getting any payments the pensioner does not receive; other annuities give a percentage of the monthly payment to a survivor; others give nothing after the pensioner dies.
The Rules for Survivors of Group RRSP Pension Earners Also Vary
As with DC pensions, group RRSP pensions have different rules depending on the company setting up and administering the plan. You have to check the terms of your pension or your spouse’s pension with the administrators. Don’t assume you will automatically inherit the same pension funds or pension payments as the pensioner received!
Checking Survivor Pension Entitlements is a Key Step in Pension Planning
The frequent use of the words “may, possible, probably, often” and so on in this article should point out clearly that there is no standard answer for what pension you will receive if your spouse or partner dies. It’s critical for proper pension planning to check the details of the specific pension plans your partner participates in.
You can review the CPP rules at Survivor Benefits, and Canada Pension Plan Survivor Benefits.
The conclusion of your review may very well be that you should not rely on receiving much or anything from your partner’s pensions if he or she dies first. If you don’t think you can survive on only your own pensions and savings, it may be time to try to improve the value of those.
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Do you find it shocking that if your spouse dies you could receive none of their CPP monthly payment? Do you know if you would get anything from your spouse’s work pension/s if he or she died? Please share your experiences with a comment.
