An important part of any Canadian’s pension planning is the benefits they may be entitled to receive from Government-sponsored pension plans. There are two main pension arrangements that you are automatically entitled to if you have worked and paid income taxes in Canada for a sufficient number of years.
Here we’ll take a look here at the two main plans, The Canada Pension Plan (CPP) and the Old Age Security (OAS) pension to show how they differ and explore how much you will contribute and can receive in retirement.
What is the Canada Pension Plan?
The Canada Pension Plan is a taxable pension benefit that you are automatically included in if you have held paid employment or self-employment in Canada and made at least one contribution to CPP Canada.
You may also qualify if you are the spouse or common-law partner of a member of the CPP in Canada, or if you become entitled at the end of a marriage or common-law relationship.
There is often confusion about how the two main Government pension plans work, so firstly let’s answer the question “what is CPP in Canada?”.
CPP is a pension you can draw at any time from age 60 to age 70. The amount you receive is based on several factors, which we will explain below.
It’s important to remember that, although you automatically have to contribute to CPP if you are employed or self-employed, and have earnings over $3,500, you don’t automatically receive the pension. You must apply for it. That said, CPP Canada will write to you just before your 65th birthday to let you know your options.
There are also additional benefits that may be available to contributors to CPP, or their dependants:
- Post Retirement Benefit – If you continue to work after you start drawing CPP, you can continue contributing, which will give you additional CPP income.
- Disability Pension – If you suffer from a long-term physical or mental disability that prevents you from working you may qualify for a disability pension.
- Post Retirement Disability Benefit – a new benefit from January 2019 designed for people who didn’t qualify for Disability Pension because they had started drawing retirement benefits before age 65. Subject to eligibility criteria.
- Survivor’s Pension – a spouse or common-law partner of a CPP contributor can benefit from a pension. The amount depends on a number of factors.
- Children’s Benefit – if a CPP contributor qualifies for the Disability Pension or if they die, a dependent child under age 18, or under 25 if in full-time education, can qualify for a flat rate Children’s Benefit.
- Death Benefit – A fixed lump sum ($2,500 in 2022) payable to the deceased’s estate or eligible beneficiaries. Subject to sufficient contributions having been paid.
Canadians are lucky to have generous government pension schemes. Still, for many people retirement can mean a large reduction in lifestyle without additional retirement planning. It is never too early or too late to speak with a financial advisor.
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How does CPP work?
Every individual who is either employed or self-employed in Canada, with the exception of Quebec, pays a fixed percentage of their earnings into the CPP as long as they earn more than $3,500 per year. Quebec has its own arrangement, the Quebec Pension Plan (QPP), that pays similar benefits.
The benefits they receive at retirement are calculated based on the average of their earnings over their working life, their contributions to CPP and the age they choose to begin drawing benefits.
The pension can be drawn at any time between age 60 and age 70, although the standard retirement age is 65. If they’re drawn earlier than 65 the benefits will be reduced, and they will be increased if drawn later.
It isn’t necessary to stop working to draw retirement benefits, and you can continue contributing at the same time as receiving a pension, up to age 70.
The pension, once drawn, is protected against inflation and is payable until death. A surviving spouse or common-law partner may also continue to receive a pension as a proportion of the deceased’s pension.
If you have had periods of unemployment or time off work due to illness, or qualifying child-care, that time may qualify towards your CPP contributions.
How do I apply for CPP?
Once you’ve decided to draw the CPP you can complete the Canada Pension Plan application online through your My Service Canada Account or via a paper application, which can be posted or dropped into a Service Canada Office.
Online is quicker and you should normally receive confirmation within 7-14 days, whereas a paper application can take up to 120 days.
However, before applying for CPP you should check your entitlement and we would always recommend that you consult a financial advisor. They will help you decide whether it’s best to draw the CPP immediately or defer it.
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How much will I contribute to CPP?
If you are employed by someone else, you will contribute 5.7% of your “pensionable earnings” to CPP.
Your CPP contribution is based on your “pensionable earnings”. This is your employed earnings or self-employed income, after expenses, between a fixed lower amount of $3,500 per year and an upper ceiling, which is increased each year by the average increase in Canadian earnings. From January 1st, 2022 the upper earnings ceiling is $64,900.
For example, if you earn $50,000 in 2022 your CPP contribution will be $2,650.50.
How to calculate CPP contributions:
- $50,000 earnings - the $3,500 basic exemption = $46,500
- $46,500 × 11.4% = $5,301
- $5,301 ÷ 2 = $2,650.50
You can calculate your CPP contribution by applying the 11.4% rate to your earnings between the lower amount and the upper ceiling for each year.
If you are an employee, your employer pays half of this contribution, and you pay the remaining half. If you’re self-employed you pay the full 11.4% yourself.
A self-employed person also earning $50,000 like the example above would have a CPP contribution of $5,301 since they would not split the total with an employer.
From 2019 the total contribution was gradually increased from 9.9% to its full level now of 11.4%. The increase was to pay for enhancements to CPP.
A history of contribution rates can be seen below:
|Year||Maximum annual pensionable earnings||Exemption amount||Maximum contributory earnings||Employee and employer contribution rate||Maximum annual contribution for an employee||Maximum annual contribution for self-employed|
Who is eligible for CPP?
To qualify for CPP you must have made at least one valid contribution to CPP and be at least 60 years old.
A “valid” contribution can be as the result of receiving credits from a former spouse or common-law partner resulting from the ending of the relationship.
If you have lived and worked at some time in Quebec, the QPP and CPP work together to ensure all contributors receive a similar pension.
If you’ve worked at any time outside of Canada you may still qualify for CPP for those years, or a similar pension from the country, or countries, that you worked in if the country you worked in has international social security arrangements with Canada.
Countries with social security agreements with Canada include:
- Antigua and Barbuda
- Czech Republic
- South Korea
- St. Kitts and Nevis
- Saint Lucia
- Saint Vincent and the Grenadines
- Trinidad and Tobago
- United Kingdom
- United States
How much CPP will I get?
The CPP benefits you will be entitled to are dependent on your contribution history, average earnings over your working life and the age at which you start drawing the pension. As such, it’s not straightforward to calculate your CPP entitlement yourself. However, your record is available online through My Service Canada, so if you register for an account and log in you can see your contribution history.
Once you’ve logged in to your My Service Canada account you can use the Canadian Retirement Income Calculator, which will give you an estimate of the CPP and OAS benefits that you have accrued to date.
What is the maximum CPP benefit?
For 2022, the maximum CPP pension for someone retiring at age 65 is $1,253.59 per month, and the average monthly amount paid for a new claimant retiring at age 65 was $702.77 as of October 2021.
If you carried on paying CPP contributions after age 65, towards Post Retirement Benefit, you could receive a slightly larger pension after 65.
But bear in mind that your CPP benefit will be based on your personal situation, so it’s important to use the Canadian Retirement Income Calculator and to speak with a financial advisor to look at your entire retirement situation.
What is OAS?
The Old Age Security (OAS) pension is separate from CPP and differs in that it isn’t dependent on you having worked. There is also no contribution to OAS. Low-income recipients may also qualify for related Guaranteed Income Supplement (GIS).
If you live in Canada at the time you reach 65, to qualify you must have been a citizen or resident of Canada for at least 10 years after age 18 and be age 65 or over.
If you live outside Canada at age 65 there are different qualifying rules, but you may still qualify.
If you qualify for OAS the maximum payment (between January and March 2022) is $642.25 per month. The payment is reviewed quarterly to reflect increases in the Consumer Prices Index.
The amount you receive is also dependent on whether you have a spouse or common-law partner who also receives OAS.
If your total income is between $79,054 and $133,141 (as of January 2022) your OAS will be reduced on a sliding scale to zero at the higher end of earnings.
You don’t normally need to apply for OAS if you qualify.
Can I receive CPP and OAS?
Yes, you can, and you don’t have to draw them both at the same time. The qualifying rules are different for both, so you may receive one but not the other.
Are CPP and OAS enough to live on?
We would suggest that, for most people, the answer is “no”.
In Canada, we are lucky to have one of the more generous government pension schemes in the developed world.
However, if your earnings at retirement are at the upper ceiling for CPP, and you qualify for maximum CPP and OAS, the combined pension from both would be about a third of your post-retirement income. And most people would consider this to be too big a reduction in lifestyle.
So, the answer is to consider CPP and OAS as only a part of your overall retirement planning strategy. If you want to enjoy a comfortable retirement you will definitely need to make additional arrangements and invest throughout your working life, and we would recommend you seek financial advice at the earliest opportunity to ensure you don’t have a painful gap between your expectations and reality. There are lots of options from TFSAs and RRSPs to robo-advisors, to the stock market and much more.
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