Canada has a lot of great things to offer; great scenery, food, and people. However, there are also other great things about Canada in the way of retirement benefits. If you are lucky enough to have called Canada your home for a specified number of years, you could be eligible to collect two retirement benefits. The first one being the Canada Pension Plan (CPP), and the second one being Old Age Security (OAS).
Although both can provide monthly benefits during retirement, they are very different. Each are calculated differently, have different rules of eligibility, and characteristics specific to each.
Both CPP and OAS were established as supplementary retirement income sources. They were not designed to be the sole source of retirement income. However, many Canadians seem to be unaware of this and believe that CPP and OAS will be sufficient retirement income.
In this weeks article we look at CPP in depth; eligibility, benefits amounts, delaying vs. taking early, splitting CPP, and other CPP beneifts.
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Canada Pension Plan (CPP)
CPP is a taxable monthly retirement benefit. It is designed to replace part of your income when you retire. CPP is funded by contributions from people and businesses currently working in Canada.
If you are an employee, your CPP contribution (5.1% of your wage up to a max of $58,700) is automatically submitted by your employer. Your employer also makes a contribution of 5.1% on your behalf.
If you are self employed you must make the full 10.2% contribution.
Eligibility for CPP is less complicated than that of OAS. To qualify you must:
- Be at least 60 years old
- Have made at least one valid contribution
Valid contributions can come in several ways. Obviously, contributions for work you did in Canada count. However, you can also receive CPP credits from a former spouse at the end of a relationship.
Furthermore, CPP contributions can be made even if you are working abroad. There are some countries that have a Social Security agreement with Canada. This allows you to earn CPP credits while not working in Canada.
How CPP is Calculated
So we know that contributions are simply a percentage of your income up to a maximum yearly amount. The amount of benefit that is received depends on several factors:
- The age you decide to start receiving CPP
- How much you contributed to CPP and for how long
- Your average earnings throughout your working life
There are two components of your CPP; the basic component and the enhanced component. The basic component is based on the best 32 years of earnings. The enhanced component is calculated used your best 40 years.
There is a total of 47 years of potential CPP contribution (age 18-65). Of those potential 47, your best 40 are used in the calculation. However, more years can be dropped if you took time off work for reasons of disability or child rearing.
By dropping the years where income was really low, it enhances your benefits. The maximum benefit that is paid out to anyone in 2020 is $1,175.83/month.
Delaying vs. Taking Early
Although CPP is typically applied for at age 65, it does not have to start then. You can apply to have CPP start as early as age 60, or delay applying till as late as age 70.
If you do decide to start receiving CPP earlier than age 60 there is a penalty. This penalty comes in the way of 0.6% decrease for every month prior to your 65th birthday. For example, if you were to turn 65 in 29 months, your CPP benefits would be reduced by a total of 17.4% (0.6% * 29 = 17.4%).
On the other hand, if you delay receipt of benefits, you are rewarded. For each month you delay receiving CPP you receive a 0.7% increase. For instance, if you delayed for 33 months your benefit would increase by 23.1%.
Splitting/sharing your CPP with your spouse can help to lower tax payable. Splitting/sharing must be applied for and eligibility is dependent on one of two things;
- If only one of you contributed, you can share the one pension.
- If both contributed, you receive a share of both pensions.
The total amount received is the same whether you decide to share it or not. The only thing that changes is who the CPP income is attributed to.
The amount that can be shared is based on the time you and your spouse or common-law partner lived together during your contributory periods.
There are a couple of other benefits in addition to CPP retirement benefits. These include CPP disability, survivor benefits, and post-retirement benefits.
CPP disability provides a benefit for those who have contributed enough to CPP and are unable to work at any job due to catastrophic disability. Benefits may also be available to their children.
For a disability to qualify it must be both severe and prolonged. It is not an either or qualification, you must meet the characteristics of both.
After Death Benefits
Upon the death of a CPP recipient there are three potential benefits that are paid out; death benefit, survivors benefit, and children’s benefit.
The death benefit is a one-time lump sum payment to the estate of the deceased CPP contributor. The death benefit must be applied for by the executor of the estate within 60 days of the date of death. To be eligible for the death benefit the deceased must have made contribtuions to CPP for at least:
- One-third of the calendar years in their contributory period for the base CPP, but no less than three calendar years; or
- 10 calendar years.
The amount that is received is a flat $2,500.
A lot of people are continuing to work later in life. No matter what the reason is, you can use this to increase your CPP benefits.
If you continue to work while receiving your CPP pension and are under age 70, you can actually continue to contribute to CPP as well. These contributions will go towards what is called the Post-Retirement Benefit. This will, in-turn, increase your CPP benefit income.
Although CPP is not enough to live on in retirement, it can provide a healthy component to your monthly income. Sit down and meet with a financial planner to make sure you are getting the full benefit of CPP. You could be missing out on some additional benefits.
In addition, depending on how your other retirement income is structured, delaying or taking CPP early may be beneficial. Do not wait untill retirement to start planning. The earlier you can start the more time your plan will have to work its wonders.
If you want to discuss your financial situation and/or future retirement, send us a message.
Stay tuned for next week’s article where we go in depth on OAS.
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Disclaimer: This Forbes Wealth Blog is for informational purposes only and does not constitute financial, legal, or tax advice of any kind. Please consult your legal, accounting, tax, investment, banking, and life insurance professionals to get precise advice relating to your particular situation before acting upon any strategy