A guide to phased retirement and working during retirement
Although retirement age is usually set at 65, many people decide to gradually stop working before or to keep working beyond 65 at a less intense pace. Here are some things to consider if you're thinking about phased retirement.
In an interview with Emploiretraite.ca (French only), EducÉpargne president Nathalie Bachand explains that "retirement is now seen less as an end in itself, but more as a change of pace in your work life." Many workers opt for a phased retirement for this reason. However, making the transition requires some preparation, as you need to determine the best time to start the process and calculate the income you'll have access to once you're retired. Whether you want to work less for health reasons or to focus on passion projects, or keep working to pass on your knowledge, here's what you need to know to begin phased retirement while optimizing your financial situation.
Did you know?
Generally, if you want to reduce your work hours at your current job before or after the official retirement age of 65, you have to ask your employer for phased retirement. However, if you retire and decide to start a second career, for example by working part-time, you're looking at a return to work, which is an entirely different situation. In either case, we recommend that you speak with a financial planner to evaluate the implications of such a decision.
The benefits of phased retirement
There are many reasons you may be considering phased retirement. It's a worthwhile option if you're not ready to leave the labour market completely and want to ease the transition from work to retirement, or if you'd like to stay active while putting your expertise and experience to good use.
Phased retirement can also be beneficial from a financial point of view, especially if you're concerned you won't have enough money for your golden years. In addition to increasing your income by combining wages and retirement incomes, you'll keep contributing to your pension plans and accumulating new benefits, even if you're working part-time.
To be eligible for phased retirement, you must meet the following conditions:
- Be between the ages of 55 and 70.
- Reach a phased retirement agreement with your employer.
- Reduce your work hours.
Optimize your employment and retirement income
Whether you're contributing to the Québec Pension Plan (QPP) or a private pension plan, there are several options available to you if you wish to take advantage of phased retirement while maximizing your retirement benefits.
First of all, you should know that phased retirement will affect the benefits paid by the QPP and that various adjustments are possible. In the case of the QPP, the amount of your pension depends on several factors, including the age at which you begin receiving it, the number of years you contributed, and the size of your contributions.
1. Claim your pension benefits and work less
You're contributing to the QPP
If you've made adequate contributions to the QPP, you could receive your pension benefits starting at age 60 while continuing to work part-time or full-time. As soon as your annual income exceeds the basic exemption of $3,500, you must contribute to the QPP. These contributions entitle you to a retirement pension supplement, which will be added to your pension, even if you already receive the maximum regular pension payable.
Your total annual supplement is 0.66% of the income on which you contributed in the previous year, as long as you're making new contributions. The retirement pension supplement is indexed annually based on the cost of living.
You're contributing to a private plan
If you're considering phased retirement from the labour market less than 10 years before the age set out in your private plan, you could receive a benefit from your plan to compensate for your reduced income, following an agreement with your employer.
Retraite Québec specifies that this amount, which is paid once per year, must not exceed the least of the amounts below:
- 70 percent of the income lost due to reduced work hours.
- 40 percent of the maximum salary on which you can contribute to the QPP, or $26,640 for 2023.
- The value of the benefit you qualified for under your pension plan or the amounts that you have accumulated.
In this case, new benefits will continue to accumulate based on hours worked. Despite the reduced time worked, the financial compensation you receive constitutes an advance on your retirement savings and will reduce your retirement income.
If you opt for phased retirement between the ages of 55 and 64, you could receive up to 60 percent of your pension benefits while working full-time or part-time, depending on the agreement reached with your employer. Depending on the plan, this measure could also allow you to accumulate new benefits to improve your pension.
Simplified pension plans
If you have a simplified pension plan (RRS), you could receive retirement income starting at age 55 by transferring the value of your benefits to your locked-in or not locked-in accounts, even if you haven't reached an agreement with your employer or reduced your work hours.
2. Work less without claiming your pension
Although you can't begin receiving your QPP pension before age 60, you can reduce your work hours starting at age 55 without impacting the amount of your future pension benefits, if you meet the conditions below.
You could reach an agreement with your employer to keep contributing to the QPP as though you're earning the same salary. This is not an inherent part of phased retirement, however, so you'll need to make a request.
Let's take Martine as an example. Her work hours were reduced by 25 percent after she reached an agreement with her employer about contributing to the QPP as part of her phased retirement. If we consider that she was earning an annual income of $50,000, the decrease in work hours is equivalent to a salary decrease of $12,500 ($50,000 x 25 percent). Martine will now earn an annual income of $37,500 ($50,000 - $12,500).
Under the agreement, which lets her contribute to the QPP as though she were receiving the same salary, that $12,500 will be considered an eligible salary upon which her employer will continue to deduct QPP contributions. In doing so, Martine will earn an annual salary of $37,500 but will contribute to the QPP with her employer based on an annual salary of $50,000, so her pension will not be affected by her phased retirement.
For more information, please visit Retraite Québec's website.
Phased retirement after 65 is not always beneficial
Working during retirement is not always beneficial, as your employment income could impact your earnings from personal savings and various government programs.
Québec Pension Plan (QPP)
The amount of your pension is based on the average monthly income on which you contributed. That means that if you declare less income in the last months or years of your working life because you decided to reduce your work hours but did not reach an agreement with your employer allowing you to adjust your pension as outlined above, the amount of your benefits could decrease. However, it's possible that the months during which your employment income was lowest (up to 15 percent of the contribution period) will not be taken into account in the calculation of your benefits. In that case, the amount of your benefits would not be reduced.
Old Age Security pension (OAS)
If your income is high, your benefits from the government could decrease. This is the case with the Old Age Security pension. If your total annual income (all sources combined) exceeds a certain threshold ($86,912 in 2023), you may be required to pay back a portion of your benefits.
The tax credit for career extension
You should also know that there is a tax credit for experienced workers. This non-refundable Quebec tax credit aims to reduce the taxes paid on a portion of the eligible employment income of people aged 60 or older. The goal is to encourage experienced workers who live in Quebec to remain in the workforce. The maximum tax credit ranges from $1,500 to $1,650, depending on your age.
To find out which of these options would be the most beneficial for you, you can contact Retraite Québec and request a simulation of your future pension benefits. The SimulR and CompuPension tools also give you a clear idea of what your retirement income will look like. No matter what you decide, you can always contact the administrator of your private plan to make sure one of these options works for your situation. Your financial planner can also help you make an informed decision and determine which solution is right for you.
Faced with today's labour shortages, many employers are ready to provide benefits to employees who want to retire gradually or continue working past retirement age. If you reach an agreement with your employer, you could slowly begin transitioning from work to retirement while increasing your income.