Anyone who is an employee, and many people who are self-employed are part of the Canada Pension Plan (CPP). But how much do you really know about this foundation of your retirement plan?
Both you and your employer contribute to this pension. The contributions will depend on what you earn, up to a maximum that can be contributed each calendar year. If you are a lower income earner, you will not be contributing the maximum, thereby saving less. The result will be that your income from the CPP when you retire will also be less. You can check what your estimated earned benefits will be on the Service Canada website (you must register for this site for access to your personal information).
The most common question I get about the CPP is, “Should I start drawing my CPP income at age 60”? Sixty is the earliest you can start to collect benefits. I wish there was a simple answer, but unfortunately the answer is “it depends”. If you are still working you have to consider that this extra income will be added to your working income, and tax will be due on the CPP at a possibly higher tax rate. You could however, divert the CPP income to an Registered Retirement Savings Plan (RRSP) thereby adding to your retirement savings, whilst saving tax on the income. If you do not have a lot in RRSPs by age 60 this could be a viable option for you.
Remember that if you start to collect your CPP early, it is reduced by .6% per month (or 36% at age 60). That means that you are permanently giving up that extra monthly income, from the time you start it until you die. So, one of the considerations in making this decision is your family’s longevity. If you expect to live a long life, then postponing until age 65 might be right for you. If your genetics indicates that you might not live to a ripe old age, drawing out your CPP benefits early might be right for you.
This permanent loss of income would also be a bad idea for people who have no other savings to draw on in retirement. If you are going to depend on government support in the form of CPP and Old Age Security, then you shouldn’t be accepting a 36% drop in your retirement income. Diverting the CPP to a RRSP from age 60 to age 65 is also not advised for these folks. The RRSP is too accessible and there is a tendency to draw on the RRSP when things get tight.
On the other end of the scale, if you have been a diligent saver, are retiring early, and have significant RRSP savings, the years between 60 and 65 offers an opportunity to draw down some of those RRSPs whilst you are in a lower tax bracket. Leaving your CPP to age 65 may be indicated for you also.
I want to address what happens to CPP income at death. There is a one-time lump sum death benefit based on your contributions that is paid to the spouse (maximum $2500). If you are married or common law there may also be a monthly survivor benefit. The survivor benefit is based upon a combination of what the survivor themselves collect, and a portion of the deceased CPP benefits are. Beware though, that the survivor benefit will come nowhere near to replacing your total family income in the event your partner dies while retired. In fact, if the survivor is already getting the maximum CPP benefit, they may not be entitled to anything additional. That loss of income in addition to the end of your spouse’s Old Age Security income, could reduce your monthly income by as much as a $2000.
The other question I often get is “Will there be any money left in the CPP when I retire?”. In the late nineties the Canada Pension Investment Board changed how they invest our CPP savings. This has resulted in robust returns on investment in the fund. The current estimate by the government is that their reserve will remain steady for the next 75 years. Also, beginning in 2019 they will increase the contribution rates, to ensure that it remains funded for those currently contributing.
The CPP remains a foundation to your own retirement savings. Understanding how it incorporates into your personal retirement plan will depend on other sources of income at your disposal. Be sure to revisit your retirement plan regularly with your advisor.