Rounding it up
The Canada Pension Plan (CPP) is a benefit paid to Canadian residents on a monthly basis once they retire. Quebec has its own plan called the Quebec Pension Plan (QPP).
Residents receive a pension based on how much they earned and contributed to the CPP while working.
The contribution rate is 5.25% of gross employment income between $3,500 and $55,200.
There are other pension plan options available, such as Old Age Security, Registered Retirement Savings Plans, and the Supplemental Pension Plan.
Having enough money to live on when the time comes to retire is a key concern for many Canadians. Fortunately, the Canadian government has put several different pension plans in place for retirees, with the key one being the Canada Pension Plan, or CPP. Here, we will go over details of the CPP, as well as discuss some additional pension options.
What is the Canada Pension Plan?
Canada has two primary pension plans: the Canada Pension Plan and the Quebec Pension Plan. When it comes to retirement income, most people turn to the Canada Pension Plan (CPP). With the CPP, benefits are paid to Canadian residents by the Canada Pension Plan on a monthly basis. Essentially, Canadian residents receive a pension based on how much they earned while working and how much they contributed to the plan. CPP contributions are defined as a percentage of earnings for all employed Canadian adults.
Once a Canadian resident turns 65 and is ready to retire or is no longer able to work, CPP benefits kick in, and at age 60, Canadians can claim a reduced benefit. The CPP contribution rate is 5.25% of gross employment income between $3,500 and $55,200, with payroll matching provided by employers. 10.5% of an individual's net income is deductible up to a maximum of $57,960, as of 2020. If you turn 65, your CPP payments will be one-quarter of the average contribution you have made during your lifetime. The Canada Pension Plan is capped at a maximum of $1175.83 per month.
CPP benefits may be paid through different programs, depending on the circumstances that prompt the application. Take a look:
The CPP remains available to participants under the age of 70 who continue to work and receive a CPP pension. Such individuals will receive an increase in retirement income as a result of their CPP contributions.
Retirement pension: For someone who is not fully retired before age 65, a reduced CPP retirement pension or a full CPP retirement pension at age 70 may be received.
Disability benefits: Those who become severely disabled and are unable to work regularly may receive a monthly benefit amount.
Survivor's pension: If one spouse passes away, a pension may be paid to the surviving spouse.
Children's benefits: Children whose parents have contributed to the CPP but are disabled or deceased may receive benefits.
Death benefit: The payment is made from (or on behalf of) a deceased CPP contributor's estate.
There are also certain CPP provisions available for couples and families. These include:
Pension sharing: CPP retirement pensions can be voluntarily shared by married or common-law couples in an ongoing relationship.
Credit splitting for divorced or separated couples: In case of divorce or separation, your CPP contributions can be divided equally.
Child-rearing provision: The CPP may increase your benefits if you stop working or receive lower earnings while raising your children.
Children who had been living with a parent or primary caregiver and who have been orphaned may receive an orphan's pension under the Quebec Pension Plan until they turn 18.
What is the Quebec Pension Plan?
For Canadian residents who have resided in Quebec for all, or part of, their working lives, things work a little differently. The Province of Quebec has opted out of the federal government's program, but a similar pension plan is available called the Quebec Pension Plan, or QPP. The QPP offers compulsory public insurance for workers aged 18 and older with a household income exceeding $3,500. In some cases, workers may have participated in both plans while living in multiple provinces, including Quebec. If you are living outside of Quebec at the time you apply for a pension, you must apply either to the CPP or QPP to receive a pension. Whenever any one of the following conditions is met, you will make a contribution to the Quebec Pension Plan:
You have only been employed in Quebec
You currently live in Quebec and have worked in Quebec and at least one other province
You currently live outside Canada, but you worked in Quebec and one other province, with the last province you worked in being Quebec
Other types of pension plans
1. Old Age Security (OAS)
Upon reaching the age of 65, you become entitled to the Old Age Security pension. But unlike the Canada Pension Plan, this pension is available to immigrants and those with low incomes who have not paid into the CPP through income taxation.
Those who receive Old Age Security will get a 0.6% increase in their monthly pension payment for every month they delay receiving it, up to a total of 36% at age 70. Additionally, residents of Canada must have resided in the country for ten years after they turn 18 or if they reside abroad, at least twenty years after their 18th birthday in order to qualify for the Old Age Security pension.
As of 2020, the Old Age Security pension produces a much lower basic maximum monthly benefit amount of $615.53, however, it is much more accessible to those without taxable income in Canada.
2. Registered Retirement Savings Plan (RRSP)
Many Canadian residents do their due diligence and decide to save separately for retirement to ensure they have enough funds to live comfortably once retirement comes around. Canadian residents can set aside funds for retirement in a registered retirement savings plan, which can be established separately or jointly with their spouse. Banks and other institutions in Canada are authorized to open RRSP accounts, which can be funded by the account holder until the age of 71. A self-directed RRSP can be opened through an investment firm for maximum control. Even though these types of accounts often allow for more financial freedom during retirement, account holders are still limited to a maximum amount that can be put into an RRSP each year. As of 2020, contribution to an RRSP is capped at the lesser of either $27,230 per year or 18% of earned income.
By the time a person reaches age 71, RRSPs must be cashed in for their full value, converted into Registered Retirement Income Funds (RRIFs), or invested in annuities. In addition, RRSP holders may withdraw as much as $25,000 per year as tax-free income for purposes of buying a house or for pursuing postsecondary education. This type of withdrawal program is considered a loan, so the recipient must pay back the funds within a set amount of time.
3. Supplemental Pension Plan (SPP)
There is an option for some employees to be sponsored by their employers for supplemental pension plans. This type of supplemental plan provides pension benefits on the portion of the salary not covered by the base plan and is funded by employee contributions each payday. There is no double-dipping because the employee receives two pensions on the same income. If an employee has worked for a defined benefit SPP for a number of years, they’ll typically receive a fixed percentage of their salary.
How much do these accounts pay?
To summarize, this is how the CPP pays:
The amount that the CPP pays is dependent upon the age you started your pension, your average income, and your contributions
There is a maximum monthly cap of $1175.83
The average monthly amount is $679.16
It’s important that Canadian residents plan carefully for their retirement. After many years of hard work, retiring is something that you should be able to look forward to, and this requires the ability to live comfortably once you are no longer working. As mentioned in this article, there are several different pension options for Canadian workers. Make sure to do your due diligence and find the one that’s right for you before it’s time to retire.
Ben is a freelance writer and law student at Indiana University Maurer School of Law. He previously worked in various marketing positions before launching his own content writing agency.