The Canada Pension Plan (CPP) is a social insurance program financed by payments from employees, employers, and self-employed individuals, as well as investment earnings. The CPP covers almost all working and self-employed Canadians, with the exception of Quebec, which has its own comprehensive plan, the Quebec Pension Plan. In case of retirement, disability, or death, the CPP replaces the contributors’ income. Find out how much CPP you’re entitled to at each age, whether it’s 55, 60, 65, or 70.
A question I often get asked in my financial planning practice by those close to the start date age of the Canada Pension Plan (CPP) benefits is “Should I collect my CPP early?” The reality is that the answer is not as cut and dry as it may seem, and usually comes back to “It depends.”
There are several factors to consider: Do you require the additional income immediately? Are you still working and thus possibly in a higher tax bracket compared to retirement? Have you considered the opportunity cost and crossover age where waiting to take CPP made sense? There are answers to all of these questions and many more in our Comprehensive Guide to Canada Pension Plan (CPP).
What is CPP?
The Canada Pension Plan (CPP) is a social insurance program that helps contributors and their families when they retire, become disabled, or pass away. It provides a monthly, taxable benefit to replace your employment income, as well as some monetary compensation to the survivors of the contributors. It is an application-based benefit that you will receive for the rest of your life if you qualify, and to apply, visit the Canada.ca website. The amount of CPP you will receive is based on the contributions you provided during your working life.
Every employed individual in Canada who surpasses the minimum exemption threshold is required to make contributions to the Canada Pension Plan. Contributions are compulsory if you remain employed until the age of 65, and after that, they become optional until the age of 70 for those who choose to continue working.
You are guaranteed to get CPP when you retire. When you contribute to the Canadian Pension Plan, your money goes towards a fund that is used to pay out CPP upon your retirement. This money is only ever used for your CPP payment. A common misconception is that the CPP may go bankrupt because it’s a social insurance program, however, the federal and provincial governments have made changes to the program in the past to secure it for future generations to come.
What are the benefits of CPP?
In addition to the CPP retirement pension, you may also qualify for other CPP benefits. Like the CPP retirement pension, you will need to apply for these benefits.
If you continue to work and contribute to your CPP while receiving CPP payments and are under age 70, your CPP contributions will go toward post-retirement benefits (PRB), which will increase your retirement income with this benefit.
If you are under 65 and are not receiving CPP yet, and have a mental or physical disability that regularly stops you from doing any type of substantially gainful work, you might be eligible for this monthly benefit.
A benefit for those legally married to a deceased CPP contributor or the common-law partner of a deceased CPP contributor.
A benefit that provides monthly payments to the dependent children of disabled or deceased CPP contributors.
The death benefit is a one-time payment, payable to the estate or other eligible individuals, on behalf of a deceased CPP contributor; it is a $2,500 payment.
Canada Pension Plan vs. Canada Protection Plan
The Canada Pension Plan and the Canada Protection Plan share an abbreviation and are easy to confuse, however, they are very different entities. The Canada Protection Plan is a life insurance provider, which is in no way affiliated with the Canada Pension Plan. CPP (insurance) was recently founded but has grown to be one of the biggest insurance companies, especially for simplified life insurance. If you are looking to increase benefits for your loved ones upon your passing you can learn more about the best life insurance companies here. However, this article is covering the Canada Pension Plan; a social insurance program offering retirement benefits to those that qualify.
The CPP (pension) itself is involved in the life insurance industry through acquiring ownership of a subsidiary company, Ivari. Ivari has been providing life insurance for over 90 years and has an impressive financial strength rating; largely in part to the backing from the Canada Pension Plan itself.
What are the necessary qualifications for the Canada Pension Plan (CPP?)
The Canada Pension Plan is a social insurance program meant to provide safeguards for the contributor and their family in cases of income loss due to death, disability, and retirement. In order to apply you need to ensure that you:
- Are at least one month past your 59th birthday
- Have worked in Canada for a period of time
- Made at least one valid contribution to the CPP
- Want CPP payments to begin within 12 months
The valid contribution to the CPP can be work you did in Canada or a result of receiving credits from a former spouse at the end of a relationship.
You become eligible to receive full CPP/QPP benefits starting from the initial month following your 65th birthday. Opting to wait until you’re 65 ensures you receive your full benefits, yet there’s an option to begin receiving them earlier, at 60. If you go this route, your benefits will be permanently reduced. Alternatively, you can delay receiving benefits until you turn 70, resulting in a permanent increase in benefits.
Similar considerations apply to individuals receiving Québec Pension Plan QPP benefits. If you’re aged 60 or older, it’s not necessary to have stopped working to receive your retirement pension from the QPP. You need a minimum of 1 year of contributions to the QPP. In cases where you’ve worked elsewhere in Canada, the QPP factors in your contributions to the CPP when determining your retirement pension amount. However, if you’ve had employment history in Québec, these earnings won’t be included in your CPP calculations.
How to qualify for maximum CPP benefits
Previously we listed qualifications to obtain any amount of CPP, but if you are looking to maximize the benefit amount you also need to ensure you have contributed to CPP for at least 85% of the time you are eligible to contribute.
- Eligibility years: 18-65 (47 years total)
- Contribution years = 40 years
In order for your contribution to count towards the number of years you contributed; you need to pay the amount calculated from the YMPE (yearly maximum pensionable earnings). Unfortunately, if you do not make enough income during that year; it does not count as a contribution.
How to apply for the Canada Pension Plan (CPP)
The CPP is an application-based benefit, and you must apply if you want to receive it as the payments are not automatic. The Government of Canada recommends you submit the application prior to when you want your pension to begin, due to the processing time. Luckily, the application process is very straightforward and only involves 2 steps:
- Complete the online application and submit it electronically
- Print out the signature page, sign it and mail it to Service Canada
You will need your SIN (social insurance number) and relevant banking information on hand for the application. You may also need to include supporting documents alongside the signature page, but this will be specified in the online application. If you submit an application for CPP benefits post turning 65, Service Canada has the capacity to provide retroactive CPP/QPP retirement payments for a span of 12 months (comprising 11 months in addition to the month you apply). However, retroactive payments cannot be dispensed earlier than the month subsequent to your 65th birthday.
How long will the application process take
The Government of Canada recommends you apply well before when you want your first payment, and this is due to the varying processing times. Service Canada will begin to process your application upon receiving the application form. This may take up to:
- 7 – 14 days for online applications
- 120 days for applications delivered to a Service Canada Centre
- 120 days for applications sent by mail
It may take longer if you submit an incomplete application, and as they will require more information.
What to do if your application is denied
As mentioned above, there are many factors that go into the consideration of whether you qualify for the CPP benefits. If you meet the qualifications, you do not need to be worried about your application being denied. However, if your application is denied, you will have the opportunity to appeal to the Canada Pension Appeals Board and ask them to review your application. They will inform you if there are missing documents you need to provide to gain approval or tell you which requirements you do not meet.
When can you start collecting Canada Pension Plan (CPP)?
You can take CPP as early as age 60, but you will receive fewer benefits than if you wait. For every month you begin collecting before your 65th birthday, there will be a reduction of 0.6%, accumulating to a yearly decrease of 7.2%. Opting to initiate pension collection at age 60 will result in a total reduction of 36%. If you wait until your 65th birthday, you will receive your full benefits. You can also choose to delay your benefits until age 70, which grants you extra benefits.
What are the risks associated with when you collect CPP?
As with any financial plan, there are many risks associated with when you collect CPP. These risks include:
- Market risk – chance that the stock market return will not meet expectations
- Inflation rate risk – imposed by above-average inflation rates
- Longevity risk – associated with the length and quality of your life
Not all these risks apply to everyone’s specific circumstances, but they are important to consider when deciding on your retirement plan. All 3 of these risks are decreased the longer you hold off on collecting CPP; as we can see through the relation between success rate and when you take CPP.
When reviewing retirement planning the success rate is measured by taking the retirement plan and comparing it with historical records of stock, bond and inflation rates. A plan is considered a “success” when it performs well with real-world returns. This analysis is by no means foolproof, but it does a good job of visualizing the decreased risk associated with delaying CPP collection.
Given an average CPP payment of $8,687/year at the age of 65, we can map out the success rate changes the later you collect CPP. For example, if you choose to collect your CPP at the age of 63, you will have a 53% chance of benefiting from your decision.
While the success rate does drastically increase as you delay collecting your CPP, this does not directly correlate to which age you should choose to collect. It is simply a good statistical measure to showcase the potential growth of CPP. Your decision should ultimately suit your personal retirement plan, and that is covered here.
How much of the Canada Pension Plan (CPP) benefit will you receive?
The amount of your CPP retirement pension depends on different factors, such as:
- Your income prior to retirement
- The type of income you receive
- The number of low earning years
- Years spent caring for small children
- The age you decide to start your pension
For example, if you worked more than 40 years at the Yearly Maximum Pensionable Earnings (YMPE), you would qualify for the maximum CPP benefit. This benefit changes each year in January to match the cost of living, and for 2022, the maximum CPP at age 65 is $1,253.59 per month for new recipients. This value is subject to change depending on when you choose to collect CPP.