Between them, the Canada and Quebec Pension plans cover every Canadian who does paid work, whether as an employee or self-employed. Employees and their employers split the cost of contributions.
The self-employed pay both sides themselves. Contributions are not based on full income, but rather on “year’s maximum pensionable earnings,” a measure of the average wage. CPP covers people everywhere but Quebec. Both plans are plans are very similar, and are integrated so those who move between provinces do not lose benefits.
Please note that CPP introduced new rules effective January 1, 2011. While QPP has announced its own revisions, I will only cover CPP in this infokit. Here is some detailed information on the new rules.
CPP retirement benefits depend on your record of contributions and when you start taking benefits. In 2011, the maximum monthly benefit payable at 65 for a new recipient is $960. CPP is still payable, even if you retire outside Canada. If the amount doesn’t seem like much, consider this. CPP benefits are fully indexed for inflation, with adjustments made quarterly. If your RRSP earns 6% and inflation averages 3% you would need $176,530 to fund the same income stream for 20 years. So, self-employed persons who think of opting-out of CPP by paying themselves dividends rather that pensionable self-employment earnings, should think twice before doing so.
Effective January 1st, 2011, Finance Canada announced changes to how Canada Pension Plan will work. The goal is to keep older workers in the workforce longer in order to lessen the future labour shortage when the baby boomers retire. In brief, the changes will take effect over a period of time from 2011 to 2016, so will affect anyone planning to retire from 2011.
a) early retirement (before age 65) will result in a reduction in CPP benefits by 7.2% per year, which is up from the traditional 6%. This means that if you begin to take your pension at age 60, rather than waiting to 65, your payments will be cut by 36%, not 30%. There is a transition period. The following table outlines the increase in the monthly actuarial factor for each year.
|Year||monthly reduction||annual reduction|
b) on the flip side of this, for late retirement (after age 65 but before age 71), CPP benefits will be increased, not by 7.2% but by 8.4%, which is up from the traditional 6%.
This means that if you wait until age 70 to take your CPP, the benefit payments will be 42% higher, compared to the previous 30% higher. The following table outlines the increase in the monthly actuarial factor for each year during the transition phase.
|Year||monthly increase||Annual increase|
c) if you want to begin to collect CPP while you are still working. then instead of having to stay out of work for 2 months as before the changes, you can begin to collect CPP at age 60 even if you continue to work – AND after age 65 if you are collecting CPP but want to continue to work, or return to work, you have the choice to contribute to CPP again through your work in order to increase your benefits.
d) the calculation for CPP will change as well – before the changes, the lowest 7 years of earnings were deleted from the calculation – under the new rules, the lowest 8 years are omitted so that the benefits are not weighed down by low earning years. These changes do not affect the Quebec Pension Plan. Here is more information about the integration of the new rules. http://www.hrsdc.gc.ca/eng/oas-cpp/changes.shtml
Here’s a rule-of-thumb method used by Service Canada staff in advising people (assuming the 2016 rates):
1. Determine how much you would get if you were now 65. That figure is available from your local Health and Welfare Canada income security office. Let’s say it’s $960 a month.
2. Reduce that by 0.60% for each month you start early. Starting at 60 cuts it by 36% -or $345 per month to $615.
3. Multiply that by the number of months until age 65: $615 x 60 = $36,900.
4. Divide that by $345, the reduction from step 2. That’s 106.96. 5. Divide that by 12. The answer –8.9 years- is your approximate break-even point. So waiting until 65 can make sense if you expect to live past 73.90.
Should you take the CPP early or wait? This highly depends of your own personal circumstances. Here are a few pointers:
• Consider waiting if you don’t need the money to live on, are in good health and find yourself in a high tax bracket. The CPP benefit and any earnings on it will be taxed.
• Consider waiting if the benefit could also increase your exposure to the OAS clawback.
• Waiting means your benefit will be higher when you do start collecting CPP. You might even find that the extra 0.7% per month plus indexing beats the after-tax income you would make if you took the money early and banked it.
• However, if you need income and would otherwise have to draw from RRSPs, starting CPP early would likely be best for you because it would mean that your RRSP funds can stay tax-sheltered longer. This depends on your marginal tax rate and the rate of return you earn on your RRSP.
There is also a death benefit from CPP. That is a lump sum of $2,500 plus a monthly income based on the survivor’s age. You can find more on this on the Service Canada website at: http://www.servicecanada.gc.ca/eng/isp/cpp/postrtrben/main.shtml
You must apply for government benefits: they do not begin automatically. You should complete the application form a couple of months before you become eligible. Here is the form you will need. https://catalogue.servicecanada.gc.ca/iforms-iformulaires/l
Remember that we are there to help if you need us with figuring out your CPP options!