What is the Canada Pension Plan?
The Canada Pension Plan (CPP) is a federal social assistance program. Canadians pay into the program based on earnings while they are working and then receive monthly benefits in retirement. Employers and self-employed people also contribute to the plan, and the plan earns investment income to help it meet its benefit obligations. The plan also pays disability and survivors’ pensions and may provide benefits to the dependent children of contributors in some cases. Benefits are indexed to inflation. The Province of Quebec operates its own pension plan.
Do I qualify? How much can I receive?
If you have worked in Canada, you have almost certainly paid into the CPP, so you will be able to collect benefits. But you must apply – benefits do not begin automatically. You can apply as early as age 60 (your annual benefit will be 7.2% smaller for each year before age 65 that you begin) or as late as age 70 (your annual benefit will be 8.4% larger for each year after age 65 that you wait).
Your benefits are based on how much you paid in and how long you worked. As of 2019, the maximum amount you can receive if you apply at age 65 is $1,155 per month.
CPP has provisions for excluding from your benefit calculations some years when your earnings were low. You can also apply for the “child-rearing provision,” under which your calculation will exclude years when you had little or no income because you were caring for your children. In most cases, if you qualified for the old Family Allowance program or for the Canada Child Tax Benefit you can apply for this provision.
Another potentially valuable provision is pension sharing: you and your spouse can apply to share your pensions equally, possibly resulting in tax savings.
How does CPP fit into your retirement plan?
Before you reach age 60, start planning your CPP application. With your financial planner, figure out how much cash flow you will need in retirement. Let your financial planner guide you in this because they are trained in using realistic assumptions and projections and in looking at all your sources of income, including possible company pensions, RRSPs and TFSAs, non-registered investment income and any other income you may have. They will calculate the most advantageous time for you to start receiving CPP benefits based on your personal circumstances.
If you choose to continue working while you receive CPP benefits, and if you are younger than 70, you can continue to make CPP contributions until age 70 – in fact, between age 60 and 65, contributions are mandatory if you’re working. They are optional for those aged 65–70. The payments you make will go toward post-retirement benefits – additional benefits of up to about $27 per month.
CPP provides a death benefit, a one-time payment of up to $2,500 made on the death of a CPP contributor to that person’s estate. The estate’s executor must apply for the benefit and the deceased must have contributed to the CPP for at least three years.
CPP may also pay survivor benefits to your spouse and/or children if you pass away while collecting benefits. The amount your spouse could receive depends on whether he or she is also receiving CPP payments, his or her age and how long and how much you contributed. If the deceased was over 65, their spouse could receive up to 60% of their benefits. Dependent children could receive a flat-rate payment of $250/month (2019).
How does Old Age Security fit in?
If you’ve lived in Canada for more than 40 years, you may be eligible for full Old Age Security (OAS) benefits; you can apply for partial benefits if you’ve lived here for 10–40 years. Benefits are based on net income, so work with your financial planner to find ways to minimize your net income, such as planning ahead and drawing down your RRSP and using life insurance to grow assets – tax sheltered – outside your RRSP. Like CPP, you can wait to apply for OAS until age 70 and receive a larger monthly benefit. If your net income exceeds $77,580 (2019) you will be required to repay some of your OAS benefits (“clawback). If your net income exceeds $125,696, you cannot receive benefits. The maximum monthly OAS benefit is about $601 (2019). OAS is also indexed to inflation.
When applying for CPP and OAS benefits, consider the implications of starting benefits at different ages from 60 to 70. The picture also changes depending on whether you are still working or not. Instead of automatically starting at 65, discuss these scenarios with your financial planner, who will help you make the decision based on your individual situation.