The Canada Pension Plan (CPP) is an important income source for retirees and should be considered when planning for retirement.
Although an early retirement is something I regularly think about, I’ll admit that the Canada Pension Plan isn’t something I’ve fully thought out. My employer automatically takes the required amount off each cheque, and since it isn’t optional I tend to forget about it.
When to Apply
Between the ages of 60 and 70, anyone can apply to start getting monthly CPP payments.
Last year the government changed the rules so that you can start getting benefits when you turn 60 without quitting your job or reducing the hours you work (previously you had to stop working).
Estimating the Amount You Will Receive
The maximum monthly payment in 2013 was $1012.50 per month which is likely only received by a small percentage of Canadians.
According to Stats Canada, the average payment was $602.83 per month.
The amount of the monthly payment depends on two things:
- Years you have contributed to the plan. The government has a formula that says if you have contributed for 40 years (85% of the eligible period – ages 18-65) you will qualify to get the maximum. The more of your middle-aged years you don’t contribute, the less you will get when you retire
- Amount you have contributed into the plan. Every year you work, you pay into the CPP – which adds to the amount you will get when you retire. If you work during your eligible years (ages 18-65) and pay less than the annual maximum into CPP (ie. part time), you will get less when you retire. In 2013 the maximum annual amount was $51,100. If you made less than this in 2013, then you wouldn’t have contributed enough in that year to qualify for the maximum.
For most people it is safe to assume that they will not receive the maximum monthly payment. As more people are attending post-secondary schooling than in the past, they are entering the workforce at an older age. This means less working years paying into CPP – and lower monthly payments upon retirement.
The easiest way to estimate your CPP payments is to contact Service Canada (1-800-277-9914) and ask for a CPP statement of contributions.
Taking Canada Pension Plan Early
You can apply to start receiving CPP benefits as early as age 60 – but you pay a penalty through reduced benefits for getting the amounts early.
The penalty is 0.6% of the benefits you would have received at age 65 for every month before your 65th birthday that you collect benefits.
For example: George retires early at age 61 and decides to start taking his CPP benefits at that time. There are 46 months between when he retires and his 65th birthday. His monthly CPP benefit payments can be estimated at: $1,012.50 – $279.45 ($1,012.50 x 46 months x 0.6%) = $733.05. The monthly benefits are taxable and this amount is before taxes.
Deciding whether to take CPP early depends on a few things:
- If you think your expenses will be higher (ie. wanting to travel) you may want to use the extra income
- If you don’t need the cash until a later date you may want to delay it until you turn 65
- If you expect to live into your early 80s you may want to delay the payments until you turn 65 (if possible)
How to Lower Your Taxes
One easy way to save money on taxes payable through CPP payments is to assign up to 50% of your CPP benefits to your spouse (assuming both are over 60 years old).
If one spouse has higher CPP benefits and the other spouse has lower benefits (or none), this strategy can save taxes by assigning up to half the CPP income to the lower-earning spouse.
Related: Property Tax Comparison
The maximum amount that you can split is the total pensions earned together (up to 50%) and depends on how long both spouses have lived together while paying CPP.
Where to Get More Information
If you do wish to start receiving CPP payments you need to apply 6 months in advance. The number for Service Canada is 1-800-277-9914 and they can assist by looking at your CPP Statement of Contributions.
Conclusion: It’s unlikely I will receive the maximum monthly benefit from CPP simply because I haven’t worked consistently since I was 18 years old and some years that I did work I only worked part time during summers when attending school.
I plan on taking CPP relatively early – there is an associated penalty with this but I would prefer to put the money towards travel when I am still healthy. My wife and I do plan on splitting our pension income to reduce the taxes we pay.
Have you considered how much CPP you will receive?