You’ve been contributing for years, but do you know what you’ll get?
For Canadians at or nearing retirement, the Canada/Quebec Pension Plan (CPP/QPP) can be a bit of a mystery. Many people who have been contributing to it for a good portion of their lives may not be sure when to begin their pension or how much they’ll receive.
There’s also some confusion about which is a better strategy: begin drawing pension income early at age 60, or wait until age 65? Here are some facts that can help you determine what’s best for your situation.
Fact 1: You can take CPP/QPP early and continue working
You can start collecting a CPP/QPP retirement pension as early as age 60. However, if you begin either pension early, it will be reduced by 0.6 per cent per month prior to your 65th birthday up to a maximum reduction of 36 per cent.
The impact of the CPP/QPP early retirement reductions, assuming an individual would qualify for a $1,000/month retirement pension at age 65:
If you choose to receive your CPP/QPP pension early and continue working, you’ll also have to continue making contributions until you turn 65. Each year of additional contributions results in an added annual benefit for the remainder of the pensioner’s life. Under CPP, the “post-retirement benefit” is equal to 1/40 of the year’s maximum retirement benefit, if you make the maximum contribution in a year. Under QPP, this benefit is known as the “retirement pension supplement,” and is added to the pension for the remainder of the pensioner’s life. It’s equal to 0.548 per cent of the previous year’s earnings that were the basis for the contribution. Your advisor can give you more details about the post-retirement benefit or retirement pension supplement.
Fact 2: You can delay taking CPP/QPP and receive more
If you were to start receiving your CPP/QPP retirement pension after age 65, it would be increased by 0.7 per cent per month that you delay taking it. The maximum pension increase is 42 per cent at age 70.
If you continue to work between the ages of 65 and 70, you’ll be subject to CPP/QPP premiums by default. If you’re currently receiving a CPP retirement pension, you can elect out of paying premiums by completing form CPT30, Election to Stop Contributing to the Canada Pension Plan, or Revocation of a Prior Election.
You can’t opt out of paying QPP premiums, even if you continue working past age 70.
The CPP/QPP retirement pension amounts if an individual is eligible for a $1,000/month pension at 65 and defers to a later age:
Fact 3: Your pension is based on your earnings – and your lowest‑earning years are excluded
The monthly amount you’ll receive is based on your earnings and the predefined contribution period, which may be longer than the period in which you actually contributed. Remember, if you decide to retire early, CPP/QPP benefits will be reduced.
A pension benefit is calculated by dividing the individual’s earnings by the number of years in the contributory period, multiplied by the benefit rate, which is 25 per cent. The CPP was enhanced in 2019 and will now replace 33 per cent of an individual’s earnings after 2019. The QPP was also enhanced (called the additional plan) in 2019 and additional contributions will replace 33 per cent of earnings.
A dropout period allows for years of low earnings. Under CPP, up to eight of your lowest-earning years (17 per cent of the contributory period) are automatically removed from the calculation. This is in addition to the child-rearing dropout provision.
QPP offers a similar dropout provision – up to 15 per cent of the contribution period when earnings were lowest can be removed from the benefit calculation. Other exclusions include months when an individual received a CPP/QPP disability pension, an unreduced income replacement indemnity, or family benefits paid by the federal or Quebec governments for a child under seven years old.
Fact 4: There are death and survivor benefits
The CPP/QPP death benefit consists of a lump-sum payment of up to $2,500 and a survivor’s benefit. However, if a spouse is already receiving a CPP retirement benefit, the monthly amount (retirement plus survivor benefit) can’t exceed the maximum retirement benefit and is adjusted based on the surviving spouse’s age. This rule applies for QPP when the surviving spouse is 65 or older. When the surviving spouse is under 65, it’s possible for the combined benefit to exceed the maximum retirement benefit.
Unless there’s a spouse or minor children, the only benefit paid is the small lump-sum benefit. Also, if you take CPP early and continue to contribute (or continue to contribute after age 65, if you’re still working), your additional contributions go towards your post-retirement benefit but won’t be included in the calculation of survivor or disability benefits, or for pension-sharing or credit-splitting purposes on marriage breakdown.
With QPP, the additional contributions that go towards the retirement pension supplement are included in survivor benefits. However, the retirement pension supplement isn’t included in disability benefits or for credit-splitting purposes on marriage breakdown. In the case of voluntary pension sharing, the additional contributions will be included.
Some things to consider
Have you stopped working?
It generally makes sense to take the CPP/QPP early if you’ve stopped working. The contribution period continues until you start taking the pension or are 70 years of age, whichever is earlier. If you’re no longer contributing, the zero earnings during the non-contributory period before starting your pension may lower the overall benefit collected, even if you waited until age 65.
Are you currently receiving a survivor’s benefit?
Your early retirement benefit will be combined with your survivor’s benefit, and this combined payment is capped at the full maximum retirement benefit for the year. The age at which you begin your retirement pension may affect the amount of survivor’s pension you receive going forward. Obtain an estimate for your combined payment before commencing your own retirement pension to understand what adjustments, if any, will be made to your current survivor’s pension.
Are you single?
Because the only death benefit is the small lump-sum amount, you may want to take CPP/QPP early, unless you have an above-average life expectancy, to make sure you get as much out of the plan as possible. See Fact 4.
Do you have health concerns?
If you qualify for the disability benefit, it’s better to apply for that benefit because it’s higher than the retirement benefit. However, if you don’t qualify for the disability benefit and your health issues could affect your life expectancy, you should consider applying for the early retirement benefit.
Are you healthy and continuing to work?
If you are, the 2019 benefit reforms will generally reward you. Postponing the commencement of the pension and continuing to contribute will increase your retirement pension and the total amount you collect from the plan. Of course, the total amount received from the plan depends on an individual’s life expectancy. Life expectancy will continue to increase in the future, as shown below.
Expected years of life remaining at age 60 and 65:
Source: Mortality Projections for Social Security Programs in Canada, Office of the Superintendent of Financial Institutions, April 2014.
If you qualify for a CPP/QPP pension, you can request estimates of how much you will receive under different scenarios, for example, if you begin collecting at age 60, or if you stop contributing but wait until age 65 to start your pension.
Once you receive your quotes, your advisor can help you determine which option makes the most sense for your situation. With appropriate planning, you can maximize the benefits you receive in your golden years.
How much will you receive?
The following resources can help you estimate how much CPP or QPP you will receive.
Canada Pension Plan:
- Request two scenarios using the Estimate Request for Canada Pension Plan Retirement Pension and Post-Retirement Benefit form:
- Retire at 60, start CPP at 60
- Retire at 60, start CPP at 65
Quebec Pension Plan:
 This provision applies to all pensioners under age 65 who are receiving a CPP/QPP pension regardless of when they started receiving their CPP/QPP pension.
 For the CPP death benefit, if you received this amount and you’re a beneficiary of the deceased’s estate, you can choose to include it either on line 11400 on your own tax return or on a T3 tax return for the estate. With respect to QPP, the death benefit must be reported in the income of the estate, regardless of the name to which the cheque was payable.
 The rules for combining benefits don’t apply to the CPP post-retirement benefit. These amounts will be added to your retirement pension even if you receive the maximum.