Are you looking to make the most of your pension plan? Do you want bigger payments when you retire? If so, you've come to the right place.
To take advantage of pension plans in Canada, you need to make sure that you understand the Canada Pension Plan (CPP) to the fullest. With this, you need to know about how much you can make in contributions to the plan as well as the deductions that you can get with the pension plan.
There is a lot to learn, so keep reading to get started.
What Is the CPP?
CPP stands for "Canada Pension Plan." This is a retirement pension that is a monthly, taxable benefit. It replaces a portion of your income if you're retired.
The best part about the CPP is that you'll receive the payments for the rest of your life once you qualify. Here are the qualifications for the CPP:
- You must be at least 60 years of age
- You must have made at least one contribution to the CPP that the CRA (Canada Revenue Agency) considers valid
Keep in mind that valid contributions can include contributions made through your employer in Canada or your former spouse or your former common-law partner's employment in Canada.
Unfortunately, the payments from the CPP aren't automatic. To get CPP payments, you have to apply.
How Much Can I Receive from the CPP?
Your monthly payment from the CPP will depend on the following:
- The average amount that you earned throughout your lifetime
- The amount that you contributed to the CPP
- The age that you started your CPP payments
You may start receiving your CPP monthly payments as early as 60 and as late as 70. However, the standard age to start your pension is at the age of 65.
The earlier you start your pension, the smaller your monthly amount will be. Similarly, the later you start your pension, the larger your monthly amount will be. The maximum amount of money that you can receive monthly is achieved at the age of 70.
As the CPP payment only covers about 25% of the average person's income, you may work or be fully retired while pulling your pension payments. The average monthly pension payment is between $650 and $700 a month. Many retirees work part-time to supplement this income.
How Much Does Age Affect CPP Payments?
As we mentioned above, the age that you start receiving benefits does affect the amount of money that you receive every month. The earlier you claim the payments, the smaller your monthly payments are. The later you claim the payments, the larger your money payments are.
The midline is the age of 65 years. The Canada Revenue Agency calculates the amount that you would receive monthly if you applied exactly at the age of 65 years. Then, they conduct additional calculations based on when you actually claim the payments.
If you start collecting pension payments before you hit the age of 65 years, your monthly payments will decrease by 0.6% each month. This means that your payments will be decreased by 7.2% each year.
The maximum reduction in your payment is 36%. This applies if you start receiving payments at the age of 60 years old.
If you start collecting pension payments after you hit the age of 65 years, your monthly payments will increase by 0.7% each month. This means that your payments will be increased by 8.4% each year.
The maximum increase in your payment is 42%. This applies if you start receiving payments at the age of 70 years old.
Keep in mind that this is the maximum amount added to your monthly payments. If you decide to start receiving your monthly payments after you reach the age of 70 years, there is no benefit.
No money is being added to your monthly payments. In fact, you're losing money by not having claimed them yet.
How Do I Decide at What Age to Start My CPP Payments?
There is no concrete answer for when to start your CPP payments. Your decision is a gamble.
You want to try to find the age that gives you the most money across your lifetime. If you start too early, you won't get as much money as you could've if you live a long life. If you start too late, you may miss out on the fun of retirement if you don't live as long.
To decide which age is best for you, you need to take several factors into account:
- Your current health
- Your family history of health late in life
- Your family history of the average age of death
- How much you plan to spend in retirement
- How much you'll make in retirement besides the pension plan
- How much you have in your savings account
If you're suffering from financial difficulty early on in the pension-eligible ages, you may benefit from collecting payments now. If you're low on retirement savings, you may benefit from waiting for the larger pension payments later.
No one can give you the exact time that you should cash out on your pension plan. However, you can try to make your best guess given all of the variables you do know about your health physically and financially.
If you're completely lost on how to approach the CPP payments, you should discuss your situation with a financial planner. This professional should be able to help you get the most money that you can back from your contributions to the CPP.
What Are CPP Deductions?
CPP deductions are also CPP contributions. This is the amount of money that your employer takes out of your pay cheque and sends to the Canada Revenue Agency.
Keep in mind that you have to have made at least one valid contribution to the CPP if you want to take advantage of pension payments later on in your life.
If you're unsure as to whether or not you've made contributions to the CPP, you can contact Service Canada or log into your My Service Canada account online.
Before you're paid every period, your employer deducts some earnings for the following things:
- Income tax
- Contributions to Employment Insurance
- Contributions to the Canada Pension Plan
All of these deductions take money away from the final amount that you're paid, and your employer sends the money to the Canada Revenue Agency. The proof that you paid these amounts through your pay cheque is recorded on your T4 form annually.
Your employer can only take a deduction for the CPP if all of the following apply:
- You are between the ages of 18 and 70 years
- You are not in pensionable employment during that particular year
- You are not considered disabled under the CPP
- You do not receive a CPP retirement or disability pension
If you're curious as to how much was taken for each tax, you can look at your pay stub. This piece of paper may be digital or given to you physically with your payment.
Your pay stub should give you your gross pay (amount of money you make before taxes) and your net pay (amount of money you make after taxes).
What Are the Maximum CPP Deductions?
In 2020, the maximum annual federal employee contribution to the CPP was $2,898. This means that no individual could contribute more than this amount in the entire year.
If you're self-employed, the maximum annual contribution to the CPP was $5,796 in 2020.
The rate of taxation for the CPP in 2020 was 5.25% for traditionally-employed individuals while it was 10.5% for self-employed individuals. This is because traditionally-employed individuals have employers who are paying the other half of the tax. Self-employed individuals must pay the half of the employer and the half of the employee.
Because of the recent pandemic, the maximum deduction limit is going to increase in 2021. Many Canadians were economically hurt by the pandemic, leading the government (and everyone else) to believe that we need to give more effort into saving and planning.
With this change, your 2021 CPP deductions could increase by as much as $268.50 in a year, or $22.40 in a month. This means that the employee contribution limit for 2021 is $3,166.45.
If you're self-employed, the maximum annual contribution to the CPP is $6,332.90.
The rate of contribution to the CPP in 2020 is 5.45%. For self-employed individuals, this comes out to 10.90%.
For now, the government has planned on increasing pension payments up until the year 2025 so that they can provide more substantial monthly payments to retirees.
What Is the Statement of Contributions?
If you're looking for a document that has everything that you need to know about your contributions to the Canada Pension Plan, the Statement of Contributions is what you're looking for.
The Statement of Contributions is a detailed record of your pensionable earnings and your contributions to the CPP. The document shows how much you contributed to the CPP every year as well as the earnings by which the government based your contributions.
One of the most beloved features of the Statement of Contributions is that it details how much you would receive monthly if you were eligible to receive your pension now. This is a great detail for those older adults who are trying to figure out when the best time to cash out on their pension plan is.
Because it holds all of this information, the Statement of Contributions is a great retirement planning tool.
Where Can I Find My Statement of Contributions?
If you're trying to plan for retirement or you're curious as to how much you've contributed to the CPP, you may want to look at the document for yourself. To do so, you'll want to visit your My Service Canada account. There, you can view an online copy or print the document.
However, you will not be able to see a copy if one of the following applies:
- You have only worked in Quebec
- You worked in Quebec and at least one other province but you currently live in Quebec
- You worked in Quebec and at least one other province but you currently live outside of Canada and the last province you lived in was Quebec
What Are Pensionable Earnings?
As we mentioned, the Statement of Contributions shows your pensionable earnings. This is the amount that you earned through employment (whether traditional or self-employment) during each year. This level of earning falls above a minimum and below a maximum that the CPP set.
The minimum level is known as the "basic exemption," while the maximum level is known as the "maximum pensionable earnings."
Put simply, you do not contribute earnings that are below the minimum or above the maximum. If you earned less than the minimum, you did not contribute to the CPP that year. If you earned more than the maximum, your statement will show the maximum pensionable earnings for that year.
The CPP consists of two different parts: the base portion and the enhanced portion.
The base portion is calculated on earnings that fall in between the minimum and maximum pensionable earnings for that year.
The enhanced portion is made up of two additional portions. The first additional portion is a 2% increase in the pensionable earnings, while the second additional portion is an 8% increase on top of that.
These were added in order to give people a chance to contribute even more to the CPP.
Keep in mind that these percentages are split between employer and employee. An individual who is self-employed will pay both halves to account for the employee and employee.
More About Finances
With tax laws changing so frequently, it's important to stay up to date on the most recent changes that can and will affect you. Whether it's maximum CPP deductions or tax credits, our team here at Insurdinary has everything that you need to know.
Now that you're an expert on CPP deductions and contributions, it's time to learn a few more things about government finances. Feel free to find the next great read in our list of government articles. You may find the next great secret to getting money back on your taxes.