Losing a spouse or common-law partner is devastating, both emotionally and financially. Even more so if it happens earlier than expected. Financially, the death of a spouse will result in a reduction in your household income and in some cases this may be a significant reduction. However, unlike going through a divorce or breakdown of a relationship, the household assets will generally remain intact and in some situations there may be life insurance available to pay off liabilities or replace some of the lost income.  

Taxation will also be more punitive once you’re on your own. You’ll lose the ability for income splitting, and your tax bill will likely be higher as an individual than as a couple for a similar level of household income. Having all the income falling on the shoulders of one individual can also result in Old Age Security (OAS) clawback.

Impact on government benefits 

The deceased’s OAS payments will stop. The OAS allowance for the survivor may be available up to $1,468.47 per month, but only if you are aged 60 to 64 and have income less than $26,496 (April to June 2022).

The deceased’s Canada Pension Plan (CPP) retirement benefit will stop. There is a one-time CPP death benefit of up to $2,500 available and a CPP survivor’s benefit. 

The CPP survivor’s benefit amount is dependent on several factors:

• How much and for how long the deceased contributor paid into CPP
• The age of the spouse or common-law partner when the contributor dies; and
• Whether the survivor is receiving a CPP retirement or disability pension. 

Although the maximum amount in 2022 for a survivor age 65 and older is $752.15 per month, the average amount in 2021 was only $307.55. When your CPP retirement benefit is combined with a CPP survivor’s benefit the total amount can never be more than the maximum CPP retirement benefit amount (adjusted for the age you initiated your CPP payments). In other words, if you are already receiving the maximum CPP retirement benefit you will not be entitled to any CPP survivor benefit.

If you and your spouse participated in CPP pension sharing, on the death of the first spouse your CPP amount reverts back to your own CPP entitlement, plus any CPP survivor's benefit you are entitled to. 

Impact on defined benefit pensions 

A defined benefit pension plan is an employer-sponsored pension plan that pays the retired pension plan member a monthly lump sum amount for their entire life. If you have a spouse or common-law partner when you retire, unless your spouse chooses to waive their rights to survivor benefits, you will be required to take a joint pension that pays income as long as either of you are alive.

When you retire you have to choose the form your pension income will take. The normal form of pension is a single pension, payable for your life only. The remaining options are essentially the mathematical equivalent of that option. They each pay a little less but come with options to ensure there are funds available should you pass away prematurely (guaranteed options), or to provide income for your spouse or common-law partner when you do pass away (joint and survivor options).

Peter and Laurel are 65 and just starting retirement, with an income goal of $80,000 per year after-tax, indexed at 2%. They each receive the maximum CPP and OAS that they initiated this year at age 65. Peter has an RRSP worth $200,000 and Laurel has an RRSP worth $400,000; these assets are invested in a conservative balanced mutual fund that is expected to earn a return of 4.75% annually. 

Peter has spent 35 years as a teacher, and has earned a pension. He now has a choice between a joint non-reducing pension that will pay $4,242.52 per month as long as either Peter or Laurel are living, or a joint 100/60 pension what would initially pay $4,381.12 per month, but on Peter’s death would decrease by 40%. The pension is only partially indexed to inflation; we have assumed indexing at 1.2%. 

Let’s compare each option if they both live to age 95, or if Peter unexpectedly passes at age 69. Laurel anticipates she will still require the same level of after-tax income because her household expenses will not decrease significantly when her husband passes.

If they both live to age 95 they have more than enough assets and income sources available to meet and surpass their income goal. Although they are slightly better off by electing the reducing option, the difference is minimal. 

However, with Peter’s death at 69 his CPP and OAS benefits disappear. Laurel is not eligible for the OAS survivor benefit as she is over age 64 and she is not eligible for any CPP survivor’s benefit, as she is already receiving the maximum CPP retirement benefit. In addition, all the taxation of the income, including the income from the registered accounts falls into her hands, with no ability to pension income split and the loss of several tax credits. As a result of Peter’s death not only is Laurel’s income goal not met, but there is a significant difference between the two pension options. With the reducing option Laurel is only able to replace 89% of her income versus the non-reducing option where she will receive 98%, almost all of her annual income goal. 

As this example illustrates, when choosing your pension options, it may be tempting to elect the option that puts more in your pocket immediately, but choosing the option that provides protection in the case of a premature death is a small price to pay to ensure your significant other is taken care of as much as possible. In some cases the reduction option occurs on the first death, either the death of the pension plan member or their spouse. As a result, in these situations, it’s not just your spouse’s future you are protecting by choosing a joint non-reducing option, it’s also your own.   

Losing a spouse or common-law partner early in your retirement will greatly impact your financial and emotional well-being, however, there are ways to mitigate the financial impact: 

• Consider permanent life insurance
  Whole life insurance and universal life insurance policies provide lifetime coverage that is in force from the date of purchase until you pass away. Having permanent insurance protection on you and your spouse, or a joint first-to-die policy will ensure income replacement for one of you when the other passes away. To learn more about the various types of insurance and how they can protect you and your family please refer to our ATB Wealth article, How to choose the right type of life insurance for you. Although life insurance is available to purchase in your later years, it’s best to apply while you are relatively young and in good health. As you age it may be less affordable and harder to qualify.
• If you have a spouse or common-law partner and have a defined benefit pension plan, choose a joint non-reducing option
  Employer-sponsored pension plans are meant to provide lifetime income throughout a couple’s lifetime. Ensure you choose an option that protects both you and your spouse or common-law partner as long as either of you are living.  

There are many other unplanned situations you may experience in retirement that could create havoc with your finances. Regardless if the situation is one we’ve discussed above, or some other incident such as an unexpected health event, your adult children requiring financial assistance or an unexpected home maintenance cost, basic financial management strategies can help mitigate such events. Having an emergency fund, ongoing budgeting and making appropriate adjustments to your financial plan are essential for protecting your financial security. 

Retirement planning doesn’t stop once you start retirement. It is important that there is ongoing review of your financial plan and the assumptions that have been made. You may have to adjust your goals or make adjustments for life expectancy, inflation, your investment allocation or withdrawal strategies. An ATB Wealth advisor can work with you to review and monitor your plan and keep you on the path to reaching your lifetime goals.

Read more articles below to learn about other common scenarios that can impact retirement and how to create a plan that protects your goals.