CPP - The Basics
I see viral posts on Facebook about CPP and OAS almost every week and oftentimes the information is just flat out wrong and it’s also very apparent that the average Canadian doesn’t understand where their basic pension income is coming from and why.
For that reason, I have decided that I am going to devote the next three blog posts to breaking down Government Pension Plans (CPP, OAS and GIS), because this is going to be the base of almost every Canadians retirement fund, so you should understand how much you’re going to get and why.
CPP, or The Canada Pension Plan is the biggest piece of the pie and the most complex, in my opinion. I’m going to just break down the things I think you should know about CPP. If you have further questions, please feel free to ask. You can always email me at: mailto:firstname.lastname@example.org
Every employee pays into CPP for their working lives, which is matched by their employer. So, for a self-employed person, like myself, I have to pay twice as much as a regular person if I decide to pay myself a salary or bonus instead of dividends. I like a combo of both and if a business owner decides to not contribute, they better do a good job of saving on their own, because CPP is a good building block for your retirement.
First off; how much do you pay? That goes up every year based on a percentage of something called YMPE (Yearly Maximum Pensionable Earnings), which is currently at $55,900 in 2018.
You have to pay 4.95% of YMPE, minus the basic exemption of $3,500. So, in 2018 you’d have to pay $2,594 and so would your employer. All this basic exemption of $3,500 means, is that if you make under that number, you don’t have to pay taxes or even file taxes. It’s one of the benefits of making such a staggering amount of money.
$55,900 - $3,500 = $52,400
$52,400 * 4.95% = $2,594 (Paid by you and your employer)
If you made $40,000, then you’d pay less than that, because you’d be paying 4.95% of $36,500. That’s $40,000 - $3,500 = $36,500 (the $3,500 is the basic exemption amount).
So, if you make more than YMPE ($55,900), you’ll notice that at some point in the year your cheques will go up, because you’ve fully funded your contribution for the year. On a fun note, Connor McDavid will have fully contributed to CPP for 2019 before the end of the day on January 2nd. To be honest, I just try to include McDavid references as often as I can.
How much will you receive? This is difficult to know, because not everyone pays the maximum amount for their entire working lives. It's all based on how much you've paid into CPP and that's different for everyone. If you’ve always made over YMPE, then you’d receive a Maximum Pension of $1,134.17/month. The average Canadian receives $666.56/month. These pension benefits are indexed to inflation, which means that they go up as the cost of living increases. Technically, the amount you get is supposed to buy the same amount of goods in 30 years as it will today.
Below is a link to the CRA where you can follow the steps to get an estimate of your own CPP benefit information:
The government does something nice here, which is pretty rare. They know that there are years where most people don’t make much money for whatever reason, so they enable you to exclude your lowest 17% of earning months, or up to 8 years. Helps for people like me who just decided to have fun in my early 20's and barely work.
Mothers, or primary caregivers are also allowed to exclude 7 extra years from the date that their child was born. So, if you had a child in 2010, you could exclude the next 7 years to 2017, and if you had another kid in 2012, you could exclude 7 years from that date, so from 2010 to 2019 if it makes sense.
There is a big thing to consider and this is when you’re going to want to weigh your options with a CFP Professional.
You are entitled to receive full CPP at the age of 65, but can choose to take it as early as 60, or as late as the age of 70.
For each month that you choose to take CPP early, you will reduce your pension by 0.60%/month, or up to a 36% reduction if you take it at 60.
If you take CPP late, the amount will go up by 0.70%/month, or an increase of 42% at the age of 70.
Maximum CPP Amounts:
Age 60: $725.87
Age 65: $1,134.17
Age 70: $1,610.52
There’s no clear-cut answer as to when someone should take CPP. For some people, it makes perfect sense to take it early, but for others, it doesn’t make any sense to take it early. So, it is very important to discuss this with someone before making the decision as there are a number of different factors to consider.
A few last points:
- CPP income is fully taxable income once you start receiving it.
- You receive a Tax Credit for your contributions, so you don’t owe tax on that income.
- You can continue to work after receiving it, but must continue to contribute until the age of 65 if you’re working.
- After 65, you can choose to stop contributing, or keep contributing to increase your lifetime benefit with something called the Post Retirement Benefit.
There are a bunch of other things like; survivor benefits, disability benefits and children’s benefits, but I will not get into those today. There is more information on the following page: More CPP Information
CPP also pays a death benefit of $2,500. So, for those of you who have failed to talk to me or another advisor about life insurance, you can leave $2,500 to your estate to pay for a sweet sandwich tray at your funeral.
We’ll talk about OAS next.
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