There are a number of conditions that are applied when determining what your Canada Pension Plan (CPP) retirement pension will be. You should understand them before you consider at what age you should take the CPP.
This post is one in a series to help you decide when to take the CPP pension. Click on Download Zipped Excel Spreadsheets which all of these posts refer to and that you can customize for your situation. Because each person’s circumstances are different it is hoped that these posts and the spreadsheets help you make a decision. (The posts below will be adjusted later or replaced when the enhanced CPP, due to be implemented starting in 2019, has been fully documented by the government.)
|1. What is Involved||2. The Rules||3. Factors Involved|
|4. Analysis||5. Spreadsheets|
The CPP is one of three Government of Canada retirement benefits for which you may qualify. These are intended to provide a foundation for your retirement income, but are not expected to be enough to match what you had during your working years. More details are provided in Understanding Your Canadian Sources Of Retirement Income. You are expected to make up the remainder that you will need in other investments as described in the post. The CPP retirement pension is only designed to provide up to 25% of the Canadian average industrial wage, and most people do not qualify for the full amount.
The Government of Canada website describes the CPP in a series of pages that start at Canada Pension Plan – Overview. Here is a summary of the rules that apply to these posts:
- • You must apply for the CPP retirement pension. You must be at least a month past your 59th birthday.
- • You must have worked in Canada and made at least one valid contribution to the CPP.
- • You want your CPP retirement pension payments to begin within 12 months.
Contribution Period and Drop-outs
- • The contributory period starts at age 18 and goes until you reach age 65 or when you retire. For age 65, this is a total of 47 years.
- • The child-rearing drop-out provision can be applied to remove low-earning years for children under 7 years old.
- • The general drop-out provision can be applied to remove low-earning years for up to 17% of your contributory period, (after child-rearing) which can result in up to eight years of your lowest earnings being dropped from the calculation.
- • The pension is adjusted by the number of contribution years (after drop-outs), up to a maximum of 39. That is, of the 47 years that you can work from 18 to 65, and reducing it by 17% results in 39 years.
- • When working after 65, these years can be substituted for other lower earning years or be ignored.
- • The CPP retirement pension is actually calculated using months (and years, when appropriate) rather than just years as stated above. The spreadsheet uses years because the Statement of Contributions that you can download does not provide any monthly information.
- • You can select any age from 60 to 70 to start receiving the CPP retirement pension. At 65 you receive the full pension percentage. Below that you receive a reduction of 0.6% per month (7.2% per year) and above that you receive an increase of 0.7% per month (8.4% per year).
- • The pension is adjusted by the percent your earnings each year (after drop-outs) are relative to the Yearly Maximum Pensionable Earnings (YMPE).
- • Benefits are adjusted if there is an increase in the cost of living as measured by the Consumer Price Index (i.e. by inflation). Payments will not decrease if the cost of living becomes negative.
Working After Age 60
- • If you work up to age 65 you must pay into the CPP even if you are taking the retirement pension.
- • After 65 and up to 70 you can work and elect not to pay CPP and take the pension, or not.
- • There are post-retirement benefits of up to 1/40th of the maximum pensionable amount, if you are receiving the CPP retirement pension and continue to work and continue to make CPP contributions after age 60. This is added each year to increase your retirement income.
- • If you die before applying for the CPP retirement pension it cannot be paid to anyone else, unless you are over 70 and paperwork is completed in time.
- • The survivor’s benefit, which is not dealt with here, has a number of restrictions and may not provide what you expect. If you are interested, go to the Government of Canada’s Survivor’s Pension page. D. Runchey provides a good summary at Understanding CPP survivor benefit.
Applying for the CPP Retirement Pension
You can only get an accurate value of your CPP retirement pension from the Government of Canada. You can apply for the pension online by using the link mentioned above or going directly to the Apply section. It takes some time to do and there are many conditions that must be met.
You can also apply using a paper form by using this link which provides access to Form ISP-1000 (Application for a Canada Pension Plan Retirement Pension).
Statement of Contributions
You should obtain your Statement of Contributions (SOC) so that you know what the government has on record. They will use the contributions to determine your retirement pension. This is the most important document you need as it determines how many years are used for your pension and what percent your contributions are relative to the maximum.
Information on the SOC is given at Statement of Contributions to the Canada Pension Plan. You require access to My Service Canada Account to obtain the SOC. There are two ways to do this:
1) Use this link – My Service Canada Account (MSCA) – to register or sign in. With the MSCA link you can either use a GCkey or you can login via a sign-in partner (a financial institution) that requires you have an EI access code/CPP/OAS personal access code. Both take a few weeks to obtain if you do not already have one.
2) You can use your Canada Revenue Agency access, which you also have to apply for a user ID. There is a link at the bottom left of the page once you login that will take you to the MSCA or register you.
Once you have access to your Statement of Contributions, it has 4 columns: Year, Your contributions, Your pensionable earnings and Notes (which is a single letter as follows; B – Below basic exemption, M – Maximum, P – Post-Retirement benefit, S – Self-Employed earnings, CS – Credit Split)
CPP Pension Plan Payments at Age 65
The average and maximum monthly payment amounts for 2018 are given on Canada Pension Plan – How much could you receive. The Post-retirement benefit is discussed later. Note that both are at age 65.
|Type of pension or benefit||Average amount for new beneficiaries (OCTOBER 2017)||Maximum payment amount (2018)|
|Retirement pension (at age 65)||$641.63||$1,134.17|
|Post-retirement benefit (at age 65)||$9.92||$28.35|
From the above table, the maximum annual pension payment is $13,610.04. Note also the range from average to maximum which is due to the number of years worked and the salary during working years. Do not expect to receive the maximum unless you have worked for at least 39 years and always exceeded the Yearly Maximum Pensionable Earnings (YMPE) each year.
When the CPP pension amount is calculated by the government, the average of the last 5 years of the Yearly Maximum Pensionable Earnings (YMPE) is used. The YMPE is available from CPP contribution rates, maximums and exemptions. For 2018 the YMPE is $55,900.
The maximum payment amount used on the spreadsheet is the $1,134.17/month or $13,610.04/year of the table above. This is an increase of about 1.79% from 2017. The YMPE of $55,900 given above is used in the spreadsheet’s “Statement of Contributions” table.
Taking the CPP at Different Ages
As mentioned above, if the CPP retirement pension is taken at any age other than 65, it is adjusted by a percentage (column 2 on the table below). While the percentage is applied per month, these posts deal with the change on a yearly basis. The percent change compared to age 65 (which is 100%) is given in the table. The last 2 columns are calculated from column 2 and provide another view of the change for different ages.
|Age||Percent||Loss or Gain from 65||Multiplier from 60|