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When you don’t get the CPP survivor benefit you expect

‘We both take CPP but if one of us passes, what happens?’ asks Jim Harris seen here in Nanaimo, B.C., with his wife Linda. ‘I’d like to know where we stand. If you made the contributions, it doesn’t seem fair that your surviving spouse won’t get the benefit.’

CHAD HIPOLITO/THE GLOBE AND MAIL

The rules around the Canada Pension Plan survivor benefit are worth investigating before you find yourself widowed – and in shock about how little you're likely to collect as a surviving spouse.

You may not get the benefit you expect, even if both of you have contributed to CPP over decades of your working lives.

How much a person can get depends on both the age of the survivor and past contributions, as well as when CPP benefits were started. However the formula Service Canada uses is complicated, even for financial planning experts.

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Read more: Five signs you're counting too much on CPP for retirement

Related: CPP reform: What's changing and how it will affect you

Tools: 'How Long Will I Live?' and other helpful online retirement calculators

According to the formula, a surviving spouse who is age 65 and not otherwise receiving CPP benefits is entitled to a survivor benefit of 60 per cent of the CPP retirement pension of the deceased spouse, if he or she started receiving CPP at 65.

However, what survivors generally don't expect is that their CPP benefits will now be combined and subjected to a maximum.

For survivor benefits starting in 2017, the maximum combined survivor and retirement pension that would be paid is $1,114. That means if both partners were getting the maximum CPP retirement pension, there will be no survivor benefits when one dies. None. Under current regulations, the survivor is allowed to get the equivalent of only one maximum CPP retirement benefit.

Another shock is that if the survivor's CPP is less than the maximum, he or she would be topped up only to the maximum of $1,114.

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In reality, most survivor pensions are dramatically less than that amount. According to Lea Koiv, president of Lea Koiv & Associates Inc., a retirement, tax and estate planning consulting firm in Toronto, the average amounts for survivor pensions to be paid in 2016 were anticipated as $411 a month for those less than 65 and $302 for those 65 and older.

A careful read of the Service Canada website reveals that the formulae shown there apply "if the surviving spouse or common-law partner is not receiving other CPP benefits." Otherwise, the survivor will have to rely on the more complex calculations by Service Canada.

"What many do not realize is that there is a recalculation of the survivor's pension upon reaching age 65," Ms. Koiv says. "Many widows or widowers will be really surprised by the fall in their family incomes, including the loss of their spouse's OAS. If that's a large part of the family's income, it can be calamitous to lose that thousand dollars a month plus the partner's OAS, especially if you are not entitled to GIS [guaranteed income supplement]."

Knowing what's ahead could impact your decisions around CPP and your retirement planning. Ms. Koiv advises people to be vigilant about monitoring their data – and making sure it's correct – so they'll actually know what they'll be getting in the end.

"I don't think many people in this country know about these CPP survivor benefit rules," says Jim Harris, 74, a former head of media relations at the Transportation Safety Board who retired in 2004. "I wasn't aware of this wrinkle in CPP."

After retiring, Mr. Harris and his wife, Linda Harris, 66, former staff support at the Ottawa Carleton District School Board, moved to Nanaimo, B.C., where they could enjoy their love of sailing. Each started their CPP immediately at 60, choosing to take a reduced pension for a longer number of years rather than delay for bigger benefits. The couple also have work pensions, plus RRSPs, TFSAs and a RRIF.

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Mr. Harris acknowledges he might have done things a bit differently had he been aware of the CPP survivor rules and plans to check on their own situation with CPP.

"We both take CPP but if one of us passes, what happens?" Mr. Harris asks. "I'd like to know where we stand. If you made the contributions, it doesn't seem fair that your surviving spouse won't get the benefit. My understanding was that if your income in retirement is above a certain threshold, then that gets clawed back through income tax. But CPP is getting clawed back even before you reach that threshold."

Ms. Harris expressed concern that a lot of seniors would be counting on getting survivor benefits from their spouse's CPP pension, particularly since fewer people have good work pensions now.

"You expect that the government support is going to be there and that there's not some sort of catch that's going to eliminate it," Ms. Harris says. "If your financial manager or adviser isn't aware either, you're taken by surprise. We're lucky to live in Canada but you can't rely on the government for more than just a supplemental amount on your income. You really have to look after yourself."

Doug Dahmer, chief executive officer of Burlington, Ont.-based Emeritus Financial, says the basis of the CPP survivor benefits goes back a generation to when mom stayed at home and dad went to work. Now, with both spouses typically working full time, both are probably close to the maximum, so the survivor benefit isn't nearly as critical as before. He suggests that other things, such as the loss of income splitting, will impact the surviving spouse's financial position more.

"Upon the spouse's death, the first thing that happens is that you lose income splitting," Mr. Dahmer says. "The second thing is that all their RRSPs are consolidated and turned into one person's balance sheet. What happens next is the survivor loses the spouse's Old Age Security, and if she's already receiving a significant CPP, she also loses his CPP. Now she's taking money out of their RRIF and can't split it, so she's clawed back on her OAS. So you suddenly have an individual who is bringing in less cash flow and paying more in taxes."

Another issue that any contributor to CPP should understand is what you see on your statement of contributions, which is the record Service Canada keeps on your earnings and the contributions you've made to CPP, is a projection of an individual's expected CPP income at 65. Ms. Koiv points out this can be totally misleading because those government statements assume ongoing employment.

"I used to deal with a lot of employees who had been with companies that downsized and the employees could commute their pension plan," Ms. Koiv says. "These individuals might only be 50 to 55 and would look at the CPP statement and say, 'Wow, I'm getting all that money.' But they didn't notice the small font which indicated that employment was assumed until age 65."

After following recent talks held on amending CPP, Ms. Koiv says she was disappointed that survivor benefits weren't an issue in any of the discussions.

"I'm a little astonished," she says. "I think not until somebody who was sitting at that table has a spouse die, and wonders what happened to their spouse's CPP, will it actually dawn on them that the money's essentially gone back into the pool to subsidize those left in it. There's no notion of a commuted value. Some people will have paid a lot in and little will come out. The death benefit is negligible vis-à-vis what has been contributed. "

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