The Mystery of Canada Pension Plan

You have been contributing for many years, but do you know what you will get?

For Canadians at or nearing retirement, the Canada/Quebec Pension Plan (CPP/QPP) can be a bit of a mystery. Many people who have been contributing to it for a good portion of their lives may not be sure when to begin their pension or how much they'll receive.

There's also some confusion about which is a better strategy: begin drawing pension income early at age 60, or wait until age 65? Here are some facts that can help you determine what's best for your situation.|

Fact 1: You Can Take CPP Early and Continue Working

You can start collecting a CPP/QPP retirement pension as early as age 60. However, if you begin either pension early, it will be reduced by 0.6 per cent per month prior to your 65th birthday up to a maximum reduction of 36 per cent.

The impact of the CPP/QPP early retirement reductions, assuming an individual would qualify for a $1,000/month retirement pension at age 65:

Based on a $1,000/month pension at age 65.

If you choose to receive your CPP/QPP pension early and continue working, you'll also have to continue making contributions until you turn 65. Each year of additional contributions results in an added annual benefit for the remainder of the pensioner's life. Under CPP, the "post-retirement benefit" is equal to 1/40 of the year's maximum retirement benefit, if you make the maximum contribution in a year.

Fact 2: You Can Delay Taking CPP and Receive More

If you were to start receiving your CPP/QPP retirement pension after age 65, it would be increased by 0.7 per cent per month that you delay taking it. The maximum pension increase is 42 per cent at age 70.

If you continue to work between the ages of 65 and 70, you'll be subject to CPP/QPP premiums by default. If you're currently receiving a CPP retirement pension, you can elect out of paying premiums by completing form CPT30.

The CPP/QPP retirement pension amounts if an individual is eligible for a $1,000/month pension at 65 and defers to a later age:

Based on a $1,000/month pension at age 65.

Fact 3: Your Pension is Based on Your Earnings – and Your Lowest Earning Years are Excluded

The monthly amount you'll receive is based on your earnings and the predefined contribution period. A pension benefit is calculated by dividing the individual's earnings by the number of years in the contributory period, multiplied by the benefit rate, which is 25 per cent. The CPP was enhanced in 2019 and will now replace 33 per cent of an individual's earnings after 2019.

A dropout period allows for years of low earnings. Under CPP, up to eight of your lowest-earning years (17 per cent of the contributory period) are automatically removed from the calculation. QPP offers a similar dropout provision – up to 15 per cent of the contribution period when earnings were lowest can be removed.

Fact 4: There are Death and Survivor Benefits

The CPP/QPP death benefit consists of a lump-sum payment of up to $2,500 and a survivor's benefit. However, if a spouse is already receiving a CPP retirement benefit, the monthly amount (retirement plus survivor benefit) can't exceed the maximum retirement benefit and is adjusted based on the surviving spouse's age.

Unless there's a spouse or minor children, the only benefit paid is the small lump-sum benefit.

Some Additional Things to Consider

Have you stopped working?

It generally makes sense to take the CPP/QPP early if you've stopped working. The contribution period continues until you start taking the pension or are 70 years of age, whichever is earlier.

Are you currently receiving a survivor's benefit?

Your early retirement benefit will be combined with your survivor's benefit, and this combined payment is capped at the full maximum retirement benefit for the year. Obtain an estimate for your combined payment before commencing your own retirement pension.

Are you single?

Because the only death benefit is the small lump-sum amount, you may want to take CPP/QPP early, unless you have an above-average life expectancy, to make sure you get as much out of the plan as possible.

Do you have health concerns?

If you qualify for the disability benefit, it's better to apply for that benefit because it's higher than the retirement benefit. However, if you don't qualify for the disability benefit and your health issues could affect your life expectancy, you should consider applying for the early retirement benefit.

Are you healthy and continuing to work?

If you are, the 2019 benefit reforms will generally reward you. Postponing the commencement of the pension and continuing to contribute will increase your retirement pension and the total amount you collect from the plan.

Expected years of life remaining at age 60 and 65 (life expectancy will continue to increase in the future — consult your advisor for up-to-date actuarial tables).

Getting advice

If you qualify for a CPP/QPP pension, you can request estimates of how much you will receive under different scenarios. Once you receive your quotes, your advisor can help you determine which option makes the most sense for your situation. With appropriate planning, you can maximize the benefits you receive in your golden years.

Do you have questions about how CPP fits into your retirement plan and if you should take the benefit early or delay it? Contact us today to schedule a free consultation.