On February 12, 2020, Logan Wealth Management kicked off its 2020 webinar series with guest presenter, Marlene C. Buxton BA, CFP®, CLU®. Marlene is the principal Fee-Only Financial Planner of Buxton Financial Inc. This presentation was entitled: Should you take CPP and OAS as soon as it’s available? A Video of this webinar can be found here.
PART 2 OF 3
We’ve all heard of the Canada Pension Plan (CPP). Or at least, we’ve all seen the acronym on our paycheques. But what is it exactly? And why should we care?
The CPP is a form of retirement income that is open to all Canadians who have worked and paid into the system through deductions from their income. It’s actually very simple. When you contribute to the CPP, your money goes into a fund that is invested and used to pay out in your retirement; replacing 25% of your income up to the Yearly Maximum Pensionable Earnings (YMPE) amount. Some important attributes to know about the CPP is that it is a taxable benefit, allows couples to share, is indexed, and paid for life. All good things.
There are four reasons why you’d receive the CPP: retirement pension, disability benefits, survivor benefits, and post-retirement benefits. We’re going to focus on retirement pension for now.
The amount you can receive from the CPP depends on how much and for how long you’ve contributed. Keeping in mind that it is permitted to drop up to 17% (8 years) of contributions from the final calculation to compensate for years of lower income-earning, if you make the YMPE every year (in 2020, that would be $58,700) and if you contribute for at least 83% of the time you are eligible to contribute, then you’ll receive the maximum amount (which in 2020 is $1,175.83 per month). That being said, most of us, the average Canadian, won’t meet these requirements. And that’s okay. This program was created during a time when most employers provided pension plans and employees stayed with them throughout their entire working life. Since that’s no longer the case now, think of this as a cushion or a top-up on your retirement plan.
So, how do you contribute to the CPP? If you work for a company, 50% of the contributions to the plan come from the employer, and 50% comes from the employee. If you’re self-employed, you have to pay both portions, but 50% (the employer portion) is deductible as a business expense. In 2020, the annual contribution amount is $2,898 or $5,796 for a self-employed person.
For couples, if a partner has a lower income, worked part-time, exited the workforce for several years, or focused on raising a child, CPP payments can be shared between the two of you. There’s even a provision for “child-rearing” that can be factored into account and increase your total monthly benefit. That being said, CPP Sharing is not the same thing as Income Splitting. It’s done separately from your taxes and is based on the number of years you’ve been living together. Regardless of how much each partner has contributed, if both of you are 60 years old and older, the years you’ve been living together count toward calculating the total benefit you’ll receive.
The biggest decision you’ll make is when to start taking CPP. There are three points in time that affect your outcome; when you turn 60, 65, and 70. If you start CPP before you turn 60, you’ll lose up to 36% of your pension permanently. So, if you’re still healthy and have no stressors to attend to, avoid taking this route. Most people start CPP between 60 and 65, however, for every month before your 65th birthday, it is reduced by 0.6%, which comes out to a loss of 7.2% per year. You are incentivized to delay receiving your CPP until age 70, at which point, your payments will be permanently increased by 0.7% for every month after your 65th birthday, or 8.4% per year. If it’s possible for you to wait until age 70, you’ll receive 42% more which is a significant amount.
Everyone’s financial and health situation is different so what makes sense for someone you know may not be the best for you. Talking to a financial advisor who can assess your retirement plan along with your personal circumstances will allow you to set realistic goals and plan for your golden years.
