The financial impact of outliving your spouse

At this time of year, the annual RRSP contribution ritual is in full swing. In the rush to score an RRSP tax deduction, the planning side of retirement may be ignored. One area that is often forgotten is what happens financially when a retiree outlives her spouse.

Personal finances, be it paying the bills, overseeing investments or keeping the household budget on track will be the surviving spouse's responsibility alone. If your spouse is the family money manager, now is the time to learn how to manage your financial affairs.

On the expense side of the ledger, household costs will decrease, but by less than many people expect. The departed's costs for such personal items as clothing, personal services, public transit and medical care will disappear. Grocery bills will be lower, but probably not 50% lower, since buying food in smaller quantities is costlier.

The purchase and operating costs of the family vehicle will not change significantly. Rent or home ownership costs such as maintenance and property taxes, home insurance and utilities will vary little unless the survivor moves to cheaper accommodation. Travel costs, a large budget item for many retirees, will decrease, but by much less than 50%. Hotel rooms will cost about the same, and many tour companies impose a surcharge on single travellers.

According to Janet Gray, a certified financial planner at Money Coaches Canada, the expenses for a retiree living alone are about 80% of those for a couple.

On the income side of the ledger, the changes after a spouse dies can be significant.

Let's start with public pensions.

If a spouse dies at 65 or older, his partner's household income will decrease by the amount of his Old Age Security pension, generally $586.66 per month (as of the first quarter of 2018).

If a family receives the income-tested Guaranteed Income Supplement (GIS) on top of OAS and one spouse dies, any GIS paid to the survivor will be based on her widowed status and income. A survivor with reduced income could qualify for GIS for the first time.

If the survivor's new income is above the OAS income-recovery threshold (currently $74,788 annually), her own OAS could decrease or be entirely clawed back. Up-to-date details of the OAS and GIS payment amounts are published online by the federal government.

If a "legal spouse or common-law partner" who contributed to the Canada Pension Plan dies, his survivor may qualify for a one-time, lump-sum death benefit of up to $2,500. She may also receive a CPP survivor's pension benefit depending on her age, the deceased's CPP contributions, and her own CPP. Those widowed more than once will be paid only one CPP survivor's pension, the largest.

For example, a survivor who is at least 65 could receive up to 60% of her deceased spouse's CPP retirement pension. However, the total of her own CPP pension plus the survivor's pension is capped at the maximum CPP pension for a single person, currently $1,134.17 per month.

Survivor benefits related to a spouse's employment are not standardized. Extended health-care benefits or other perks may continue, be reduced or eliminated. The workplace pension plan may pay a survivor's pension.

With a defined-contribution pension plan, a survivor's pension depends on the option the departed pensioner chose to generate retirement income.

If the contributions were used to purchase a life annuity, a survivor benefit will be paid if the annuity was purchased with a joint and survivor option. If the funds are held in a life income fund (LIF), which is similar to an RRSP, and the surviving spouse is the beneficiary, she is entitled to the fund assets. Depending on the pension plan and legal requirements, the LIF value may be paid in cash, placed in a life income fund in her name, or used to purchase a life annuity for which she is the beneficiary.

With defined-benefit pension plans, a survivor is typically entitled to 50-60% of her spouse's pension. The plan may also pay a one-time lump-sum death benefit.

The only way to be certain of the survivor benefits to which you are entitled from your spouse's former employer is to consult the employer's retiree-benefits publications and the formal pension-plan documents.

If a surviving spouse is the beneficiary or successor holder of her partner's tax-free savings account, the assets may be transferred to a TFSA in her name without affecting her TFSA contribution room, and continue to grow tax-free.

If an RRSP/RRIF holder dies and his partner is the plan beneficiary, she can move the assets into an RRSP/RRIF in her name without any immediate tax owed. The resulting RRIF payments will increase her taxable income.

If non-registered investments are jointly held, the assets flow directly to the surviving spouse. If the investments belonged solely to the deceased, they become part of the estate, and the survivor inherits the assets as specified in the will. In either case, the profits arising from the assets received will be attributed to the survivor, and subject to tax.

The payout from a spouse's life insurance policy is not taxable, but the profits arising from the funds received will be taxable in the survivor's hands.

A retiree who outlives her spouse can no longer benefit from certain tax breaks available to couples such as two basic income deductions, pension income-splitting and tax credits for combining medical expenses and charitable donations.

The death of a retiree has clear financial implications for the surviving partner. Have you factored outliving your spouse into your retirement and estate planning? If not, a good place to begin is a review of your existing financial plan and will.