Readers of our site will know we’re many years away from taking our Canada Pension Plan (CPP) benefits. That said, for many Canadians, CPP is a major retirement income source and one we’re planning on using effectively and efficiently.
What is CPP?
How does the program work?
How much income can you expect from CPP?
We’ve got those questions above covered and much more in today’s post!
Canada Pension Plan 101
The Canada Pension Plan (CPP) is a retirement pension, that is paid monthly, but it’s a taxable benefit that is designed to replace part of your employment income when you retire.
When it comes to our Canada Pension Plan (CPP), to qualify for it, you should know that current government rules dictate you must be over the age of 60.
If you qualify, you’ll receive the CPP retirement pension for the rest of your life.
To qualify you must:
- be at least 60 years old
- have made at least one valid contribution to the CPP.
We’ll talk about the contributions in a bit. Essentially, valid contributions can be either from work you did in Canada or as the result of receiving credits from a former spouse or former common-law partner.
The biggest thing to know: CPP is a contributory plan. That means your income stream from CPP depends on how much you put into the plan (to a maximum contribution amount) AND how long you’ve contributed to the plan. This makes CPP very different from another government benefit, Old Age Security (OAS). Payments from OAS come from general tax revenues.
Do you need to apply for CPP?
The short answer is, yes, since CPP payments are not automatic. The government does not guess when you want to take your income benefits. You must apply.
How much do you contribute to CPP?
Well, that depends.
The amount of your CPP benefit is based on your average earnings throughout your working life, subject to contribution limits.
With very few exceptions, every person over the age of 18 who works in Canada outside of Quebec and earns more than a minimum amount ($3,500 per year, a basic exemption amount) must contribute to the Canada Pension Plan (CPP). Essentially, this contributory program is ensuring you have some sort of a retirement income plan.
If you have an employer, you pay half the required contributions and your employer pays the other half. If you are self-employed, you make the whole contribution.
No matter how often you change jobs or where you work in Canada, your contributions may help you or your family become eligible for a retirement pension, post-retirement benefits, disability benefits and any retirement survivor/CPP death benefits. For the purposes of this post, we’ll focus on CPP as an income stream for retirement. We can tackle disability benefits and other benefits in future articles.
The Canadian government sets the year’s maximum pensionable earnings (YMPE) figure. The YMPE determines the maximum amount on which to base contributions to the Canada or Quebec Pension Plan (C/QPP).
This year, we already know the YMPE. We’ll keep this link updated for you.
Therefore, there is a maximum contribution amount to CPP in any given year. The more money you make does not mean the more you pay into CPP necessarily.
How does the program work – when can I get CPP income and how much?
If you start receiving your pension earlier, age 60, the monthly amount you’ll receive will be smaller. If you decide to start later, age 70, you’ll receive a larger monthly amount. The maximum monthly amount you can receive is reached when you turn 70.
- You must have worked in Canada for a period of time and have made at least one qualifying contribution.
- You would like your payments to begin within 12 months (e.g., you apply right after your 64th birthday because you want your benefits right after age 65.)
The amount you receive each month is based on your average earnings throughout your working life, your contributions to the CPP – Government of Canada references here, and the age you decide to start your CPP retirement pension. Again, your contributions to the CPP are based on your earnings.
The standard age to start CPP is age 65.
However, you can start receiving it as early as age 60 or as late as age 70.
If you start receiving your pension earlier, age 60, the monthly amount you’ll receive will be smaller. If you decide to start later, age 70, you’ll receive a larger monthly amount. The maximum monthly amount you can receive is reached when you turn 70.
In this government link, you’ll find the current listing of maximum payments from CPP.
You can see a big difference between the maximum monthly amount you could receive and the average monthly amount many Canadians actually get.
A good concept we’ve shared with others when it comes to the CPP income formula is to consider a pie with 39 slices. A full CPP retirement pension is based on “the best” 39 years of earnings between the ages of 18 and 65.
To get the maximum CPP benefit:
- You must contribute to CPP for at least 39 years. Yes, age 18 to age 65 is 47 years. But there are drop-out provisions we’ll highlight below. So, essentially, you don’t have to work all 47 years to get the maximum CPP. You do need to have contributed for 39 years to have a chance to get the maximum, AND
- To qualify for the maximum, you contribute for at least 39 years ideally at the Yearly Maximum Pensionable Earnings (YMPE) for those years.
So, for your pie of 39 slices, in order to receive the maximum CPP retirement pension, you would need to have 39 years of contributions, using earnings at or near YMPE to ensure you take advantage of all pension credits.
At Cashflows & Portfolios, when we run the projections for clients, we believe the best way to figure out your CPP eligibility and future potential CPP income payments is to simply get your CPP statement of contributions from the source – Service Canada.
We encourage every prospective retiree to get a My Service Canada Account to:
- Change your direct deposit information
- View the status of your application for CPP or OAS benefits
- View details and print an official proof of payment report of your CPP and OAS benefit
- and much more!
Once you have that CPP information, it will list all the years you are/you were eligible to contribute to CPP from ages 18 to 65. It will show you how much you contributed in each of those years. If you contributed the maximum, YMPE, your statement will have an “M” assigned beside it for that income year. You can add up your M’s to see if you have 39 of them! If you have 39 M’s you’ll get the maximum CPP. If you have 30 M’s you will get 77% of max CPP although certainly, you will get partial CPP credits for years you did not contribute the YMPE but contributed to the plan.
You can check out the 39-point system concept from Retire Happy, thanks to CPP expert Doug Runchey.
What are CPP drop-out provisions?
Remember the 39 slices of pie?
Since your CPP retirement benefit is based on your pensionable earnings starting at age 18, you essentially have a contribution period. Depending on how long your contributory period is, and whether drop-out provisions apply to your situation, this can allow up to eight years of your lowest earnings to be removed from the CPP retirement benefit calculation.
This is great since CPP calculations basically “drop” periods where you had zero or low earnings.
A certain number of your lowest earning years may be automatically dropped from the calculation of the base portion of a CPP benefit. This falls under a “general drop-out provision”. In fact, specifically CPP’s “child-rearing provisions” take into account periods of zero or low earnings if you were the primary caregiver for your children. Periods of disability are also taken into account in the calculation of your contributory period. Drop-out provisions are entirely another post. We’ll tackle that in the future as well!
So, in the case of someone retiring and starting CPP at age 65, and assuming there is no period of disability or low- or no-income periods dropped out for child-rearing, the contributory period would run from age 18 to age 65 as we have mentioned above, the lowest 96 months or eight years would not be included.
Again, consider requesting a Statement of Contributions from Service Canada that shows your total CPP contributions for each year, the earnings on which your contributions are based, and an estimate of what your pension would be if you were eligible to receive it now. Keep tracking that will help your financial planning!
The reality is, very few people have the necessary 39 years of maximum earnings in order to receive a maximum CPP retirement pension, but many people who have worked for decades at a modest salary will likely get >50% of the CPP maximum.
Can you work and still collect CPP?
Yes!
At age 70, your contributions to CPP cease, even if you’re still working (regardless of whether you’re employed by a company or self-employed).
How do I know that all of my contributions are accounted for?
The Canada Revenue Agency (CRA) provides Service Canada with details on your earnings and the contributions you have made. Service Canada then keeps a record – using a Statement of Contributions.
Just know when you review your Statement of Contributions, you won’t see contributions while you are receiving a CPP Disability benefit, or during periods when you have no earnings or when your earnings are below the $3,500 basic exemption amount.
What if you lived or worked in another country?
- you have worked in Canada and made at least one valid contribution to the CPP; and
- you have valid periods in a partner country that are creditable under the legislation of that country.
For example, if you did not live or work long enough in another country to qualify for benefits under its rules, your periods of contribution to the CPP or periods of residence in Canada under the Old Age Security Act may be combined with your periods that are creditable in the partner country. The combination may help you meet the minimum eligibility requirements for pensions or benefits from the other country. We also read:
“Similarly, if you do not meet the minimum contributory requirements to qualify for children’s, disability or survivors’ benefits under the CPP, a social security agreement can help you qualify. The social security agreement will allow you to combine your periods of contribution to the CPP with your periods that are creditable under the legislation of a partner country. Note that, while a social security agreement can help you to qualify for certain CPP benefits, the payment amounts will be based on your actual contributions to the CPP.”
Will I get more income if I delay CPP past age 65?
You bet!
CPP/QPP benefits normally begin at age 65, specifically the month after your 65th birthday. However, those benefits can be taken as early as age 60 and as late as age 70.
A reminder that retirement benefits are fully taxable and are indexed every year in January. If you begin your CPP payments prior to age 65, you’ll incur a 0.6% reduction for each month you collect before your 65th birthday. That’s 7.2% less per year. If you begin collecting your pension at age 60, your reduction will be 36% of what you could get at age 65.
However, if you delay your CPP payments, you’ll receive an increase of 0.7% for each month you wait after your 65th birthday. That’s 8.4% more per year after age 65. That could mean you get a 42% bump in CPP payments if you delayed CPP income from age 65 to age 70.
We are highlighting this because a serious consideration for retirees is to delay CPP to age 70 to transfer longevity risk and portfolio risk from their personal plans to CPP. The decision about when you take CPP can be related to any of the following and more:
- Your desired or needed income stream.
- Whether you plan on working while receiving your CPP.
- How much you have contributed and how long you have contributed.
- Your personal savings, investments or company pension plan (in addition to CPP income).
- Your current health, family health history or any disabilities.
- Other income streams in retirement such as business investments, winding down a corporation, rental income, etc.
I’ve heard of CPP enhancements – what does that mean?
- Since 2019, annual CPP contribution rates have been rising.
- How much your CPP benefits increase will still depend on how much and for how long you contributed to the enhancement. Canadians just entering the workforce will see the largest increase in CPP benefits. Employees who are near the end of their working life will see a small increase.
- The CPP enhancement will affect you only if you work and contribute in 2019 or later. If you are retired, not working, and not making contributions to the CPP, nothing will change and your CPP benefits will not increase.
- The CPP enhancement will happen in two phases over seven years. Phase 1 is underway now, from 2019 to 2023 and involves a gradual increase in the contribution rate. Phase 2 will begin in 2024 and will only affect those at higher income levels.
With very few exceptions, every person over the age of 18 who works in Canada outside of Quebec and earns more than $3,500 per year must contribute to the CPP. If you earn less than $3,500, you do not pay CPP contributions. Enhancing CPP is a great way to ensure we sustain a mix of public pensions and voluntary savings opportunities to help Canadians save for retirement.
What is Canada Pension Plan (CPP) Summary
There’s still a lot more ground to cover actually when it comes to the CPP.
What we want you to take away from this post is, CPP remains a very important pillar of our Canadian retirement system planning toolbox. It’s an important element as part of our government-administered plans, to go along with any employment-based pension plans, and finally those personal retirement savings plans such as TFSAs, RRSPs, and other investment accounts.
While government-administered plans like the Canada Pension Plan (CPP) are not designed to be your sole source of income during your retirement, it can be a very important one. It’s also an income stream that should be carefully analyzed as part of any retirement income projections to deliver a secure financial future, including tax efficiency.
If you want to retire comfortably – we believe you will absolutely need to supplement your retirement income through employer and/or personal retirement savings plans. But CPP is also an income source that cannot be overlooked.
A reminder, if you haven’t already subscribed, please do and download our FREE cashflow spreadsheet to see where your money goes and see if it lines up with what you’d expect!
Further Reading:
Check out our comprehensive posts on the following subjects:
Need any support or help with deciding on when to take CPP?
Knowing the best age to start taking CPP in the context of your entire financial picture can be tricky. If you need some help in solving your retirement decumulation puzzle (ie. how to efficiently withdraw from your retirement accounts), we’re here to help.
If you are interested in obtaining private projections for your financial scenario, please contact us here to get started.
Disclaimer: Any information shared on our site (“Cashflows & Portfolios” https://cashflowsandportfolios.com/) or related to our site, is for awareness and illustrative purposes only.
Great Starting Summary of CPP. A couple of overall examples might help people get started in better understanding it. Is is not that simple. You need to play with it to get a better understanding of how to apply and when to take it. It took me awhile to understand it particularly doing things list moving a portion of your CPP to your spouse to lower income taxes, starting payments at 70 so have maximum yearly pension that has CPI increases that do not exist in most other sources of pension income.
Thanks Gavin. Totally agree. CPP is messy, sadly, just like the rest of our tax system.
Huge benefits of deferring CPP in our opinion is to transfer investment risk, to increase inflation-protected payments, and to fight longevity risk. These are factors many Canadians should at least consider. These are not reasons to defer to age 70 automatically but part of the financial draw down puzzle.
We hope you subscribe and follow along. More case studies coming related to this subject.
https://www.cashflowsandportfolios.com/when-to-take-cpp-in-retirement/
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