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Retirement

What is the CPP?

Learn all about the Canada Pension Plan (CPP) and how much can you expect to receive in retirement

The Evermore Team

The Evermore Team

We all deserve to feel confident about our finances. Evermore is here to make sensible investing accessible to everybody.

This article will explain the ins and outs of how the Canada Pension Plan (CPP) program works. By the end, you should understand more about how CPP premiums are calculated and how to get the most out of yours.

We’ll also cover how to determine how much CPP retirement pension you'll receive, what happens if you decide to take your pension earlier or later than the standard age of 65, as well as what the post-retirement benefit is. 

Sections

What exactly is the CPP

How are CPP premiums calculated

When will I receive my CPP benefit

How much CPP benefit will I receive

Special provisions of the CPP

A note about enhancements

Getting ready for retirement

 

What exactly is the CPP?

The CPP retirement pension is a federally administered monthly, taxable benefit that helps to fund your retirement. If you qualify, you’ll receive a pension, which is adjusted for inflation, each year for the rest of your life.

To qualify to receive the CPP you must be at least 60 years old and have made at least one valid contribution to the CPP.

Valid contributions can be either from your work in Canada, or as the result of receiving credits from a former spouse or common-law partner at the end of the relationship.

It operates throughout Canada except Quebec which has a separate retirement pension called the Quebec Pension Plan or QPP.

You must contribute to the CPP if you are over the age of 18, work in Canada (outside of Quebec) and earn more than $3,500 a year.  

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 both contributions.

The CPP works on a monthly basis, so your contributions start the month after the month you turn 18.

 

How are CPP premiums calculated?

 You have probably noticed the CPP deductions on your pay stub. The contributions you make to the CPP are based on your annual earnings.

You won’t be required to make contributions on the first $3,500 you earn. This is referred to as the basic exemption.

In 2022, CPP contributions will be calculated on your earnings between $3,500 and $64,900.

The earnings ceiling for the CPP is set each January, based on increases in the average wage in Canada during the previous year. It is referred to as the Years Maximum Pensionable Earnings (YMPE).

In 2022, the CPP YMPE is $64,900 and the contribution rate on the pensionable earnings is 5.7%.

The maximum contribution to the CPP for employers and employees in 2022 is $3,499.80. That is the earnings ceiling of $64,900 minus the minimum amount of $3,500 multiplied by the contribution rate of 5.7%.

But for self-employed people the contribution rate is 11.4%. When you are self-employed, your contributions are based on your employment income or net business income (after expenses). You do not contribute on any other type of income, such as investment earnings.

For self-employed individuals, the maximum contribution in 2022 is $6,999.60. That is the earnings ceiling of $64,900 minus the minimum amount of $3,500 multiplied by the contribution rate of 11.4%.

If, during a year, you contributed too much or earned less than the set minimum amount, your contributions will be refunded when you file your personal income tax return.

  

When will I receive my CPP benefit?

The standard age to start the pension is 65. However, you can start receiving it as early as age 60 or delay it as late as age 70.

If you elect to start receiving your pension earlier than age 65, the monthly amount youll receive will be reduced by 0.6% per month, 7.2% per year. That means if you elect to start at 60, you’ll get 36% (5 years x 7.2%) less than if you started at 65.

If you decide to start later than 65, youll receive a bonus of 0.7% per month, 8.4% per year up to age 70. So if you waited until age 70 you would receive 42% (5 years x 8.4%) more than at age 65.

Theres no benefit to waiting after age 70 to start receiving the pension as the maximum monthly amount you can receive is reached when you turn 70.

 

How much CPP benefit will I receive?

The amount of CPP retirement pension you will receive is based on three things:

  • your average earnings throughout your working life,
  • your contributions to the CPP,
  • and the age you decide to start your pension.

The basic contributory period for the CPP is age 18 to 65. Anyone who has contributed the maximum CPP for those 47 years will get maximum pension. But you can drop out 17% of those years if they had low earnings. So you can drop out 8 years (47 years x 17%). It doesn’t matter when those years occur, whether early or later in life. This is called the general dropout provision. So, you only have to work for 39 years (47 minus 8) to be eligible for the maximum CPP pension.

Don’t worry, when you apply for your CPP pension, you don’t have to request the general dropout provision, it is applied automatically.

For 2022, the maximum CPP retirement pension amount you could receive as a new recipient starting the pension at age 65 is $1,253.59 per month. But most Canadians have not paid enough CPP premiums during their working years to be eligible for the maximum pension.

The average monthly amount people actually received starting at age 65 as of October 2021 was only $702.77, only 56% of the maximum.

To figure out the amount you would receive for your CPP benefit, you can visit your My Service Canada Account https://www.canada.ca/en/employment-social-development/services/my-account.html (this is separate from the CRA’s My Account).

In the CPP section of your account, there are options under “Contributions” to view your contributions to date, as well as estimate your future benefits. This estimation tool is really only valuable for somebody already nearing retirement because if you have several years left of contributions, your benefits might be over or underestimated depending if you expect to earn a lower or higher annual salary in your remaining working years .

For those that are farther away from retirement, try using the Government of Canada’s Retirement Income Calculator:

https://www.canada.ca/en/services/benefits/publicpensions/cpp/retirement-income-calculator.html

This will not only provide an estimate of your CPP, but also your OAS (Old Age Security), and give you an indication of what you may need to set aside in RRSPs and TFSAs. It’s a great tool.

 

Special provisions of the CPP

The child rearing provision

This is a very important thing to remember for those people that stopped working to stay home and care for their kids.

If your earnings were lower due to raising children under 7, and you were the primary caregiver (the one most responsible for the day-to-day needs of the children for the specified periods), you can request an exclusion of those years from the benefit calculation. The request is on the CPP pension application and is called the child rearing provision.

It is only for months you or your spouse or common-law partner received Family Allowance payments or were eligible for the Canada Child Benefit (even if you didnt receive it) and your earnings were lower because you became the primary caregiver of a dependent child under 7 who was born after 1958.

They do this calculation and then the general dropout provision for low earnings years (i.e. 17% of remaining years after the child rearing provision is applied). You can only make one claim per year (i.e. a single child or twins results in the same provision).

If you are already collecting the Canada Pension Plan and eligible for the child-rearing provision but did not request it when you applied, get back in touch with Service Canada to see if they will amend the calculation. This could end up increasing your CPP payments.

 

The over-65 dropout provision

If you are planning are taking a later retirement and continue to work past 65, this is another way to increase your annual CPP benefits once you elect to begin.

The over-65 dropout provision may help to increase the benefit amounts of workers who continue to work and make CPP contributions after reaching age 65, but who do not yet receive the CPP retirement pension. It allows periods of relatively low earnings before age 65 to be replaced by earnings after age 65. This provision is also applied automatically when calculating benefits.

 

The post-retirement benefit

The post-retirement benefit (PRB) started in 2012. It requires you to continue making regular CPP contributions as long as you have salary or self-employed income, even if you are already collecting the CPP pension. Paying into the PRB will result in higher future payments even if you are currently getting the maximum. Under the old rules, any CPP retirement plan recipient did not pay anything more into the CPP.

The PRB is mandatory from age 60 to 65, but you can opt out after 65. Talk to the HR department at work to opt out if you are an employee. Youll need to file form CPT30 – Election to Stop Contributing to the Canada Pension Plan, or Revocation of a Prior Election. If youre self-employed you opt out when you file your personal T1 tax return by filling in schedule 8, Canada Pension Plan Contributions and Overpayment.

  

A note about CPP enhancements

You may have heard people talking about enhancements to the CPP.

This refers to how the CPP pension is gradually increasing due to the CPP enhancement program which began in 2019. The enhancement works as a top-up to the base, or original CPP, and will mean higher benefits in retirement in exchange for making higher CPP contributions. The CPP enhancement will only affect you if you continued to work and make contributions to the CPP as of January 1, 2019. For more information on how the enhancement works, see this page on the Government of Canada website:

https://www.canada.ca/en/revenue-agency/news/2018/10/the-canada-pension-plan-enhancement--businesses-individuals-and-self-employed-what-it-means-for-you.html

 

Getting ready for retirement

The earlier you prepare, the better. In Canada, we are fortunate to have programs like the CPP and the OAS. For many of us, we will need to ensure we are investing in our RRSPs and TFSAs to supplement our government benefits and meet our day to day needs and reach our life goals. Evermore Retirement ETFs make investing for retirement easier than ever before. Click here to learn more about our funds and how they can help you invest for retirement.

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