By now, most Canadians will be familiar with the basics of the Canada Pension Plan, otherwise knows as CPP. They know that it gets deducted from their paychecks, it has to do with something about retirement, and some money coming into your pocket. What we want to talk about here is the finer details of the CPP to give a holistic and in-depth understanding so that you can plan your retirement with the right tools.
The CPP provides a partial replacement of earnings in the case of retirement, death or disability. You can get the regular CPP payments at age 65, or if you are willing to take reduced (or extended) payments you can get it at age 60 (age 70). By design, it is meant to replace up to 25% of the average wage in Canada.
However, be careful about taking that retirement cheque early, below are the rates per month that your pension goes down if you take it early. This equates to a 36% reduction if you take it at age 60 in 2016!
|Year of retirement||% (monthly reduction)|
Of course, all of this makes no difference if you don’t know how much you will get in retirement to understand that, first we need to understand how much gets deducted from your paycheck every month:
- Your contributory period begins when you reach age 18 and ends when you either start receiving your CPP retirement pension, turn 70 or die (whichever happens earliest).
- So what do you actually contribute? If you are employed, your contributions will be split equally between you and your employer, whereas if you are self-employed you pay for this yourself.
- You start paying towards CPP on earnings above $3500 (this is the minimum). This minimum is fixed and does not change. You contribute within this minimum and a maximum, which is indexed for inflation. The maximum for 2016 is $54,900.
- You pay 9.90% on earnings between the minimum and maximum. For 2016 this means if you are employed, the maximum you can contribute is $2,554.30 (with your employer matching another $2,554.30). If you are self-employed, you would contribute $5,088.60
|Year||Maximum annual pensionable earnings||Basic exemption amount||Maximum contributory earnings||Employee and employer contribution rate (%)||Maximum annual employee and employer contribution||Maximum annual self-employed contribution|
The table below shows what you can expect to receive (based on employment averages)
|Type of pension or benefit||Average amount for new beneficiaries (March 2016)||Maximum payment amount (2016)|
|Retirement pension (at age 65)||$643.11||$1,092.50|
|Post-retirement benefit (at age 65)||$13.39||$27.31|
|Survivor’s pension – younger than 65||$426.01||$593.62|
|Survivor’s pension – 65 and older||$350.54||$655.50|
|Children of disabled CPP contributors||$237.69||$237.69|
|Children of deceased CPP contributors||$237.69||$237.69|
|Death benefit (one-time payment)||$2,306.13||$2,500.00|
|Combined survivor’s and retirement pension (at age 65)||$836.06||$1,092.50|
|Combined survivor’s pension and disability benefit||$1,073.26||$1,290.81|
You can take each one of these individual benefits and break them down into their own segments, limits and uses. However, this is not the goal here, we are looking to get a holistic overview to enable proper financial planning for your future.
The final point I want to talk about is your CPP Calculation. Throughout your life, all your contributions are sent to Service Canada to determine how much CPP you will get when you retire. In some circumstances, people may not be working, they could have a child or simply be under that minimum $3,500.00 threshold we talked about earlier. Thankfully, the CPP has provisions for these circumstances:
- The General Dropout Provision automatically drops some of the lowest-earning months from your CPP calculation. In 2014 this 17% which translates into up to 8 years of your lowest earnings being dropped.
- The Child Rearing Provision, unlike the general dropout provision, is not automatically applied. However, if your earnings were lower, or zero because you were the primary caregiver of a child under 7, then you can apply to have this period also excluded from your CPP calculation.
One of the key things to do if you haven’t already is get registered on ‘My Service Canada’. Creating an account here is one of the most beneficial things you can do for yourself, it saves time and allows you to view all your information and make changes online. Whether you are retired or not, trust me, this will smooth out a process for your future (especially when you forget where all your papers are!)
If you are a numbers person and want to play around with different scenarios, check out this page, it’s a very informative and visually descriptive tool.