You’ve seen the box on your pay slip or tax return form that says “CPP Contributions.” You contribute a percentage of your income every year, and when you retire, you start collecting your Canada Pension Plan (CPP). Simple? Far from it. In this new series, I’ll look at the ins and outs of the Canada Pension Plan system and some critical changes to the rules. And I’ll help you navigate the rules, regulations, and red tape if you’re ready to start collecting.
First, let’s take a quick look at how the Canada Pension Plan works.
The Canada Pension Plan is a program that is contributed to by employees and employers. The maximum annual contribution is 9.9% of the employee’s wages up to a yearly maximum pensionable earning level (this amount is shared between the employee and the employer). In 2012, the yearly maximum pensionable earnings are $50,100. There is also a basic income exemption of $3,500. This means that there is no Canada Pension Plan contribution required on the first $3,500 of income earned. Therefore, the maximum contribution amount for 2012 is [($50,100 - $3500)] x 9.9% = $46,13.40. This amount is shared equally between employer and employee, meaning that each contributes up to a maximum of $2,306.70. This is the amount that would be contributed if the employee’s wages were $50,100 or greater. The Maximum Pensionable Earning amount is indexed each year.
2012 maximum benefit
The maximum benefit amount you can receive is $986.67 per month in 2012. To begin receiving this amount, you must have contributed the yearly maximum to the plan for a period of 40 years, and you must be age 65. To contribute the maximum to the plan, your income must have been high enough to reach the yearly maximum pensionable earnings level. As mentioned above, in 2012 this level is $50,100.
Service Canada does allow you to remove low or nil income years from your pension calculation. The maximum number of years that can be eliminated is 7, under the old rules. This means that if you have made the maximum contribution for a period of 33 years, you may qualify for the maximum benefit available at that time.
Every year or so, Service Canada will send to you an updated statement of your CPP retirement benefit contributions. On that statement they will project for you what your monthly benefit amount will be at age 65. The calculations on the CPP statement assume that you will continue to work to age 65. Since many people will not work, or will not work full time, you will need to contact Service Canada to get a more accurate projection. As I mentioned, to help ensure you are treated with the best possible pension outcome, up to 7 years of low or nil income can be removed from the pension projection. This is called the Drop-Out Provision. An additional 7 years will be removed for those parents who stayed home to take care of their children. This is called the Child Rearing Provision.
How much you'll get...and when
Based on the most accurate projected benefit amount for age 65, you can now more easily determine the monthly benefit you’d receive if you were to retire before or after age 65. The old rules required the age-65 amount to be reduced by 0.5% per month for every month of retirement prior to age 65 you began to draw from CPP. The earliest age you can begin to draw the Canada Pension Plan retirement benefit is age 60.
The converse applies for those who retired after age 65. The retirement benefit amount would be increased by 0.5% for every month after 65 you delayed in taking the pension income.
Under the old rules, to begin to receive the CPP you must also be mostly retired. This meant that you had to complete a period of 60 days of little to no income. If you were able to do so, then you would receive your CPP retirement benefit. Also, once you began to receive your CPP retirement benefit, you were no longer required to make contributions to CPP, even if you decided to go back to work. Finally, once you begin to receive the income amount, it would be indexed with inflation. Over the past several years the average indexation rate has been 1.5%.
The Service Canada website indicates that the average CPP retirement income benefit is $512.64 per month. Some of this may be due to people drawing CPP prior to age 65. Other reasons may include lower contribution levels for fewer than 40 years.
In the event of a death of a CPP pensioner, two things take place: 1) A taxable payment of $2,500 is sent to the survivor; and 2) some monthly benefit may be paid to the survivor. The amount a survivor receives would depend on the total CPP retirement benefit they are receiving today. The maximum survivor benefit for those age 65 and older is currently $592 per month. However, if the survivor is receiving a CPP retirement benefit already, the amount of the survivor benefit will be the difference between the amount they are receiving today and the maximum monthly benefit ($986.67 in 2012). Thus, if the survivor was already receiving a monthly benefit of $700, the amount of the additional survivor benefit would be only $286.67.
These were the old rules. But they are in the process of being modified. Next time, I’ll take a look at the way the CPP rules are changing and the implications for you in retirement planning.
Doug Nelson, B.Comm., CFP, CLU, CIM, is a licensed financial planner and portfolio manager at Nelson Financial Consultants based in Winnipeg, Manitoba, and a regular contributor to the Fund Library. You can reach Doug at Nelson Financial Consultants, 102 – 147 Provencher Blvd., Winnipeg, MB, R2H 0G2. Phone: 204-956-0519; Fax: 204-942-6890; Email: firstname.lastname@example.org.
Notes and Disclaimers
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The foregoing is for general information purposes only and is the opinion of the writer. No guarantee of performance is made or implied. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice. However, please get in touch with the author to discuss your particular circumstances.