A core component of your retirement plan is the CPP retirement benefit (or Québec Pension Plan for Québec residents, which mirrors many aspects of the CPP). CPP offers flexibility as to when payments can begin, which affects how much you could receive. Familiarizing yourself with CPP provisions can help you decide when to start payments and optimize the benefit throughout your retirement.
Understanding the CPP retirement benefit
Before deciding when to begin CPP payments, it’s first important to understand how CPP works. CPP provides a guaranteed income stream which increases with the cost of living. CPP aims to replace 25% of your career earnings up to the year’s maximum pensionable earnings (“YMPE”), which is the maximum earnings on which CPP benefits can accrue. The 2021 YMPE is $61,600. This amount is adjusted each year in line with increases to the average Canadian wage.
To calculate the CPP retirement benefit, your average career earnings are adjusted based on the average of the YMPE in the year CPP payments begin and the prior four years. A portion of your lowest earnings years are excluded from the calculation, as well as any years in which you took time out of the workforce to raise a child under the age of seven.
Pension sharing is available with a spouse or common-law partner if you are both over the age of 60 and receiving CPP. This allows CPP amounts to be shared between the two partners based on the joint cohabitation period to potentially realize tax savings.
CPP also provides other benefits; such as a survivor pension, a disability benefit, and a death benefit.
CPP enhancements are underway
The government has proceeded with plans to strengthen the CPP. These changes began in 2019 and will be fully phased-in by 2025. The first enhancement is to increase the CPP retirement benefit, applicable to years after these changes come into effect, from 25% to 33% of career earnings up to YMPE. This will boost the amount received from CPP and provide greater retirement income security for all working Canadians.
The second enhancement is to create a new upper earnings limit, to be phased-in over 2024 and 2025, called the year’s additional maximum pensionable earnings (“YAMPE”). The YAMPE will be 14% greater than the YMPE and will facilitate the accrual of CPP benefits up to this higher earnings threshold.
These changes will be funded by an increase to CPP contribution rates. In 2021, the CPP contribution rate for an employee has risen to 5.45% (5.90% for QPP) of earnings up to YMPE. Further contribution rate increases are to be phased-in each year until 2025.
Deciding when to begin CPP payments
CPP payments can commence at age 60 or may be deferred up to age 70. The CPP benefit is reduced by 0.6% for each month the benefit start date precedes age 65 to a maximum of 36%. The benefit is increased by 0.7% for each month payments are delayed after age 65 up to a maximum of 42%. As the CPP calculation factors in the YMPE, which increases each year, this may further boost your CPP benefit if payments are deferred.
Deciding when to begin CPP payments is an important decision which could have long-lasting impacts to your retirement income. Taking CPP benefits earlier provides additional immediate cash-flow and flexibility. However, delaying the CPP start date can enhance the sustainability of your retirement funding in the longer-term.
Two recent studies released in 2020 by the Canadian Institute of Actuaries and the National Institute on Ageing concluded that delaying CPP is financially beneficial for the majority of Canadians who are in good health and can afford to bridge the gap in income. The increases associated with delaying the start date strengthen the lifelong income stream provided by CPP while protecting against erosion from inflation. Therefore; deferring CPP payments, even by a few months or years, may provide greater income security and improve your financial health over the course of your retirement.
CPP provisions are complex. There are many considerations when deciding the right time to commence your CPP retirement benefit. It is important to seek advice to help navigate these issues and maximize the CPP benefit based on your unique circumstances. For more information on CPP and how it fits into your retirement plan, speak to your IG Consultant. For an overview of the sources of your retirement income and key steps to help you create your personal retirement plan, review IG’s “Retirement income plan checklist” with your IG Consultant.