Federal Finance Minister Jim Flaherty introduced measures today encouraging older workers to stay on the job longer by providing employers the flexibility to offer phased retirement programs.

The 2007 budget, unveiled earlier this afternoon, proposes amending the Income Tax Regulations to allow employees to receive pension benefits from a defined benefit (DB) registered pension plan (RPP) and simultaneously accrue further benefits. The regulations currently prohibit employees from accruing pension benefits under an RPP if they are receiving a pension from the plan or from another defined benefit RPP. They also prevent employers from paying a partial pension to older workers to increase the reward from full-time work, if the worker continues to accrue pension benefits.

The new regulations will allow employers to offer qualifying employees up to 60% of their accrued DB pension, while accruing additional pension benefits on a current service basis, regardless of whether the employee is working full- or part-time. The option would be limited to employees who are at least 55 years of age and who are otherwise eligible to receive a pension, without the plan imposing an early retirement reduction. The 60% limit would be based on the amount of pension benefits that the employee would be paid if he or she were fully retired.

The government plans to proceed with any changes that are necessary to the federal Pension Benefits Standards Act, 1985 to accommodate phased retirement in federally regulated pension plans. Provincial pension benefits legislation may also need to be modified to accommodate this measure.

Other measures introduced in the 2007 Budget with implications for retirement savings include:

•Enacting the Tax Fairness Plan, which delivers over $1 billion in additional tax savings for Canadians including: allowing pension income splitting;

•Increasing the age limit from 69 to 71 for converting a registered retirement savings plan (RRSP);

•Amending the list of qualified investments that can be held by RRSPs and other registered plans to include most investment grade debt and publicly-listed securities.

Benefits Canada has a page with additional reaction and commentary to the budget. To read Budget 2007: Special Report, click here.

To comment on this story email don.bisch@rci.rogers.com.