I’m seeing more and more people who are reaching the point where they’ve maxed out on their pensions and are quite happy to ‘retire’ from their career, but they’re not quite ready to be done working yet.
For many one option is that they can enjoy the fruits of decades of work by starting to draw on their pension but continue to pad their nest egg by working, or “Double Dipping”. This post-retirement employment can take many forms; it can be part time or full time, it can be in a brand new field, or the field in which you’ve worked your whole life (sometimes even with the same employer).
Overall this can be a pretty effective retirement transition strategy, but it does come with a significant tax risk.
When an employer is calculating how much tax to withhold from your regular paycheque they use a calculation based on the assumption that the income you’re receiving from them is the only income you have. Which is all well and good, but the pension is doing the same thing, at the exact same time.
Obviously they’re both wrong, but the one who has the potential to end up dealing with the consequences is you.
Think of the problem like this:
You’ve worked 30 years in a well-paying job and have a $55,000 pension. You go back to work for the same employer on a part-time, as-needed basis. You earn about $25,000 while working.
The pension fund is managed by a trustee – not the employer – and is unaware you’ve gone back to work and so they deduct approximately $10,000 believing you have a full set of personal tax credits for them to use and maxed out in the 29.7% personal tax bracket.
The employer deducts about $2,600 from your pay, because the software that they are using tells them that you have a full set of personal tax credits available for them to use and that you’ve maxed out in the 20% personal tax bracket.
Now the bad news – CRA sees that you’ve made $80,000 (all together) and that you’ve got ONE set of personal tax credits (not one for the pension and one for the employer) and they send you a bill for almost $5,000 in additional tax because the pension and the employer combined didn’t withhold enough at source. This is a very unpleasant surprise at tax time – and one that can be avoided with just a little planning.
If you’re in this situation you should talk to your payroll department and ensure they understand your other sources of income and ask to fill out a TD1 – Personal Tax Credit Return form. On the back you can indicate to your employer that someone else has taken into account your personal tax credits and that they shouldn’t double count them, and you can ask the employer to take off additional tax so that your April bill isn’t quite so large.
How much additional tax should they take off? That’s a great question, but a very individual one – one I would be happy to talk to you about!