If you’re one of the fortunate Canadians with a defined benefit pension, it changes more than just your monthly income. It affects how much tax you’ll pay, how aggressively you can invest, and how you spend throughout retirement.
Let’s explore three key ways pensions shape retirement planning.
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Tax Benefits: You Can Split Income Sooner
If you’re at least 55 and receiving eligible pension income, you can split up to 50 percent of that income with your spouse or common-law partner. This can reduce your overall tax bill significantly.
For example, if you’re 57 and receive a $100,000 pension, and your spouse has no income, splitting that pension means you each report $50,000. Instead of paying over $26,000 in tax on your own, you’ll both pay just over $9,000 each, saving more than $8,000 per year.
If you don’t have a pension, you’ll need to wait until age 65 to split income from other sources, like RRIFs.
More flexibility to spend in the early years
Many retirees spend more early in retirement when they’re healthier and more active. With a stable pension, CPP, and OAS, you may be able to spend more in the early years without worrying about running out of money later.
Let’s say you plan to spend $122,000 per year from now until age 70, then drop to $100,000 per year after that. By age 80, your combined pension, CPP, and OAS income could be bringing in $99,000 per year, indexed to inflation.
This gives you a strong income floor, meaning even if you draw down more from your investments early on, you still have guaranteed income coming later in retirement.
Potential to invest more aggressively
A pension provides a reliable income stream, which means you may not need to be as conservative with your portfolio. That opens the door to a slightly more aggressive investment mix that can generate a higher long-term return.
For example, a $1 million portfolio earning five percent per year for 20 years grows to $2.65 million. At six percent, it grows to $3.2 million—an increase of nearly $600,000.
While an aggressive portfolio brings more ups and downs, having a pension gives you the stability to ride out market volatility if needed.
Final thoughts
A pension can reduce taxes, create confidence in your spending plan, and support a higher-growth investment approach. But to make the most of it, your retirement strategy should reflect these advantages.
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