Retirement Benefits: Understanding the Canada Pension Plan (CPP)

Post Updated for 2018

The Canada Pension Plan (CPP) is a retirement pension benefit paid out by the Federal Government to eligible individuals or their families. The amount received is based on what you have contributed to the plan during your working years and for how long you made those contributions.

The CPP was established in 1966 and has undergone several changes since then with more significant changes on the horizon. For those who work in Quebec, the provincial plan is referred to as the Quebec Pension Plan (QPP).

Eligibility

The standard age to start receiving the CPP pension benefit is age 65. However, a person can become eligible for the reduced CPP as early as age 60. If you want an even increased pension benefit, you can postpone your CPP pension until after age 65 (up to a maximum age of 70).
To be eligible, you must have worked in Canada and made CPP contributions
You must apply to receive the CPP pension benefit and can do so up to 12 months before you plan to start receiving the benefit.

CPP contributions

The contribution rate for CPP is 4.95% (or 9.9% if self-employed) on earnings above $3,500 up to $55,900 in 2018. If you earn $3,500 or below (Yearly Basic CPP Exemption), you do not contribute to CPP and for earnings above $55,900 (Yearly Maximum Pensionable Earnings), no CPP is deducted. The maximum CPP contribution for employers and employees is $2,564.10 each. CPP contributions are required from age 18 but are no longer required after you start receiving CPP benefit or turn 70.

How much will you receive?

Your monthly CPP pension payment will depend on how many years you worked and contributed and your average salary during this time. Let’s break it down:

The maximum monthly CPP benefit for 2018 is $1,134.17 ($1,114.17 in 2017), while the average monthly payment amount for new beneficiaries is $691.93. Most people will not receive the maximum amount either because :

A. They have not contributed to the CPP for at least 39 years between the age of 18 and 65, or
B. They have not made the maximum CPP contributions during their working years for at least 39 years. The maximum annual CPP contribution is based on the Yearly Maximum Pensionable Earnings (YMPE) announced by Canada Revenue Agency every year.

Based on the way the CPP is set up, if you immigrated to Canada in your 30’s (like me) or later, you should not expect to receive the maximum CPP amount. This highlights the need for “new Canadians” to aggressively maximize alternative retirement savings/investing plans available including the Registered Retirement Savings Plans (RRSP), Tax Free Savings Accounts (TFSA) and other non-registered accounts.

If you want to calculate an estimate of how much CPP benefit you will receive at retirement, you can use Service Canada’s Retirement Income Calculator. Have your CPP Statement of Contribution handy… it is available on your My Service Canada Account. You can also obtain this information by calling them at 1-877-277-9914.

What Age should you choose to take CPP?

If you begin taking CPP benefits early, your CPP payment is reduced by 0.6% for each month you receive it before age 65. Conversely, if you begin taking your CPP later (i.e. after age 65), your CPP payment is increased by 0.7% for every month that you delay receiving up to age 70.

Therefore, an individual who starts receiving CPP benefit at age 60 will get 64% (less 0.6% x 60 months) of the benefits they would be eligible for if they had waited till age 65. And the individual who waits until age 70 before they start receiving benefits will get 42% (plus 0.7% x 60 months) more than they would have been eligible for if they had taken it at age 65.

Deciding on what’s best for you depends on your peculiar circumstances. There is no “one-size-fits-all” solution. Factors that should be taken into consideration include: your life expectancy, health status, current income, debt level, number of years worked, amount of benefits you qualify for, plans to continue working, etc.

CPP provisions

CPP is adjusted annually for inflation: CPP benefits are adjusted annually to account for increases in cost of living based on the Consumer Price Index (CPI).

General drop-out provision: This provision drops-out up to 8 years of your lowest earning years when calculating your CPP benefits. This helps to reduce the impact of periods when you had low or zero earnings and increases the maximum CPP pension you qualify for.

Child rearing provision: In addition to the general drop-out provision, if raising children caused you to stop working or to earn a lower income, the child rearing provision boosts your CPP benefits by excluding this period when calculating your CPP benefits.

Pension sharing: You can share CPP benefits with your retired and eligible spouse or common-law partner. This may result in tax savings if one spouse or partner is taxed at a higher marginal rate.

Other CPP benefits

Survivor’s pension: The spouse or common-law partner of a deceased contributor may be eligible to receive a monthly survivor’s pension. The maximum CPP survivor’s benefit for 2018 is $614.62 (under age 65) and $680.50 (over age 65).

Death benefit: This is a one-time, lump-sum payment made to the estate of the deceased contributor. The maximum death benefit payable is $2,500.

Children’s benefits: These are monthly payments provided to dependent children of a disabled or deceased CPP contributor. The children must either be under 18 or not more than 25 and enrolled as a full-time student in a recognized school or university.

Conclusion

The CPP pension benefit is one of 3 government benefits available to seniors in retirement. Others include Old Age Pension (OAS) and the Guaranteed Income Supplement (GIS).

It is great to have these benefits available in retirement. However, they are unlikely to be sufficient in catering to all your retirement needs. For new Canadians, the eligible amount are likely to be even lower, so it is important that you start to plan for retirement today.

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