Is phased retirement right for you?
Phased retirement at a glance
Phased retirement means gradually withdrawing from the job market. It generally requires an agreement with your employer regarding payment of benefits or a reduction in your work hours, according to your situation. A number of reasons could lead you to choose this option over full retirement, including a health problem, your own preference for leaving work gradually, or an unexpected event in your life. Certain phased retirement measures may even encourage you to return to work after retirement.
Phased retirement: Two important factors to consider
If you are thinking about phased retirement, there are 2 key factors you need to consider: your working arrangements and your financial situation.
Factor 1 - Working arrangements
Do you have the kind of job that will allow you to reduce your hours? Would your employer allow you to do so? Are you prepared to be reassigned or have your job duties changed?
Factor 2 - Financial situation
Understanding your financial situation is crucial because it enables you to plan your sources of income throughout your phased retirement. Two sources of income should be considered—public pension plans and private pension funds. As income from Old Age Security (OAS) is not tied to work income (OAS is a universal program with eligibility based on the duration of residence in Canada, and the Guaranteed Income Supplement is only for low-income retirees), the Québec Pension Plan is the only public pension plan that comes into play in phased retirement. You may want to consult a financial planner as well as the administrator of your private pension plan to figure out how phased retirement will affect you.
The Québec Pension Plan and phased retirement
The following options are available:
You can reduce your work hours without decreasing the value of your pension benefit.
If you are a salaried worker between ages 55 and 70, you can work less while contributing as much.
You cannot receive a pension from the Québec Pension Plan before age 60. However, as of age 55, you can work fewer hours while contributing to the Québec Pension Plan as if you were still earning the same salary. The goal of the additional contributions is to avoid a reduction in the amount of your future retirement pension. Your employer must agree to this arrangement, and some conditions apply.
Note that self-employed workers are not eligible for this measure. However, owners of incorporated businesses who have contributed to the Québec Pension Plan as salaried workers are eligible.
You can apply for an early retirement pension while you continue to work.
If you work and you receive a retirement pension at the same time during a given year, your retirement pension for the following year will be increased by 0.66% of the income on which you contributed during the year in question. This pension supplement, spread over 12 months, is cumulative if you work for several years. It is also indexed to the cost of living each year. Therefore, a person who began receiving a retirement pension in January 2018 and continued working will receive an increased pension in 2020, based on the income on which he or she contributed throughout 2019.
Worth knowing about...
You can request a simulation of your future pension benefit.
To figure out whether it's a good idea to receive an early retirement pension from the Québec Pension Plan or contribute to the Québec Pension Plan based on a higher wage than you actually make after reducing your work hours,
contact Retraite Québec to ask for a simulation of your future pension benefit. The projections are based on estimates of your work income in the coming years, and will help you make your decision.
Caution: You cannot receive early retirement benefits under the Québec Pension Plan AND contribute based on a higher wage during phased retirement. You must choose one or the other.
Private pension plans and phased retirement
Here again, a number of options are available, depending on whether your private plan is covered by the
Supplemental Pension Plans Act.
You have the following options:
Financial compensation from your pension plan for your reduced work hours
This is possible if you:
- Are within 10 years of the normal retirement age set by your plan
- Are 71 or under
- Come to an agreement with your employer on reducing your work hours
You can receive a benefit from your pension plan to compensate for your reduced income
The amount you receive cannot exceed the least of the following amounts:
- 70% of the income lost due to the reduction in work hours
- 40% of the maximum wage ($66 600 for
2023) on which you can contribute to the Québec Pension Plan, or $26 640 for
- The value of the benefit you qualified for under your pension plan or the sums you have accumulated in your plan
You continue to accumulate benefits as long as you work.
Worth knowing about...
This benefit is an advance on your retirement savings and will therefore reduce your retirement income.
It might not be to your advantage to use this measure to compensate for your reduced hours. Contact your plan's administrator for more information.
Phased retirement benefits, whether you are working part-time or full-time
Depending on the
agreement reached with your employer, if you are between ages 55 and 64 you can, under certain conditions, work part-time or even full-time while receiving up to 60% of your retirement pension. In addition, if allowed under the plan, you can accumulate new benefits and in this way increase your retirement pension.
If you are retired and you return to work, you must have employment under the same plan as the one under which your pension is being paid. If you begin receiving phased retirement benefits, your retirement pension will be suspended.Note that
, in a defined contribution plan, a phased retirement benefit is an advance on retirement savings; it reduces the balance of the member's account. In a defined benefit plan, the phased retirement benefit does not reduce the benefits that the member had accumulated for his or her retirement. It is in addition to the other benefits.
Special rules apply to simplified pension plans. As of age 55, you can transfer all or a portion of your locked-in and not locked-in accounts. This provides you with an income to make up for the decrease in the hours you work. No agreement with your employer is necessary.
If your private pension plan is not covered by the
Supplemental Pension Plans Act
Contact your plan administrator to find out if your plan contains provisions for phased retirement. If you have accumulated retirement capital through instruments such as registered retirement savings plans (RRSPs), you may use the accumulated sums to offset your reduced work hours.
Be careful! Make sure the sums you withdraw during phased retirement will not reduce your income in the later stages of retirement. It is a good idea to consult a financial planner for advice in this regard.