CPP Retirement Benefit: It’s All in the Timing
The Canada Pension Plan (CPP) provides a number of benefits, the most significant of which is the retirement pension that forms an integral part of most Canadians’ financial plans for retirement. The Quebec Pension Plan (QPP) provides parallel benefits for Quebec residents. Every contributor to these government-sponsored pension plans will eventually need to make important decisions about when to begin receiving these valuable benefits.
The standard age for beginning CPP retirement pension payments is the month following an individual’s 65th birthday. The amount of CPP retirement pension payable is based on how much and how long the person has contributed to CPP.
Individuals can begin to receive a CPP retirement pension as early as the month following their 60th birthday. This is treated as an early pension, and the entitlement is based on a projected entitlement at the normal retirement date reduced by a factor. The reduction factor is being increased slowly from 0.5 to 0.6 per cent per month from 2012 to 2016. This means the annual pension will be reduced by 36 per cent (i.e., 60 months times 0.6 per cent per month) for pensions starting in 2016, so that the net pension payable would be 64 per cent of what would otherwise have been receivable at age 65. The amount by which the normal pension is reduced is the cost of receiving the pension earlier, and needs to be weighed against the trade-off of receiving the CPP benefit for a longer period of time (up to 60 months longer).
When individuals elect to begin their CPP retirement pension before age 65 but continue to work, these individuals and their employers are required to make CPP contributions. Individuals who are self-employed must make both the employer and employee’s mandatory contributions. The contributions are mandatory until the individual reaches age 65.
When individuals elect to begin their CPP retirement pension and continue to work beyond age 65, they can decide if they want to contribute to CPP. Employers are obligated to deduct the employee’s CPP contribution and make the employer’s contribution unless the employee elects not to contribute. In order to stop or re-start CPP contributions, an individual must file a special form — CPT30 – Election to Stop Contributing to the CPP, or Revocation of a Prior Election — with their employer(s) and the Canada Revenue Agency. The individual can change their contribution status only once each year.
CPP contributions made while individuals are receiving CPP retirement benefits will create a Post-Retirement Benefit (PRB). The amount of PRB will depend on earnings, amount of CPP contributions during the previous year, and age as of the effective date of the PRB. The maximum PRB for one year of contributions will be 1/40 of the maximum CPP retirement pension. The PRB will be automatically added to the CPP retirement benefit beginning in the following January, payable for life. This allows individuals to receive the regular CPP inflation adjustment plus a PRB amount each January.
Individuals can delay the receipt of their CPP retirement pension until age 70. Delaying a CPP retirement pension will increase the individual’s pension entitlement. The delayed pension entitlement will be based on the individual’s projected entitlement at the normal retirement date plus a factor of 0.7 per cent for every month the pension is delayed. This means the increase factor could be as high as 42 per cent (i.e., 60 months times 0.7 per cent) if the pension is delayed until age 70.
Individuals who delay the start of their CPP retirement pension and continue to work after age 65 must continue contributing to CPP, and their employer is obligated to make the employer’s contribution.
Individuals can share their CPP retirement pension with their spouse or common-law partner. To do so, they must be receiving their pension, or be eligible to receive it, and be living with their spouse or common-law partner. The portion of their pension that can be shared is based on the number of months they lived together during their joint contributory period. Each individual will be taxed on the amounts actually received, which may result in tax savings.
The Canada Pension Plan is an important aspect of many retirement plans, and it is important to understand the flexibility associated with the beginning of benefits. Both the Quebec government and the federal government maintain excellent websites that are designed to provide answers to typical questions about Canada/Quebec Pension Plans.
E.O. & E.
Mark A Schneider CFP CLU CFSB
Chartered Financial Consultant
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