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CPP 101: All You Need to Know About the Canada Pension Plan

Most of us start planning for our retirement when we reach our 30s or when we think about starting a family. To help you plan for your retirement, the Canadian Government has several provisions for you. The Canadian Pension Plan (CPP) is one of them. The CPP was established in 1965 to provide a basic benefits package for retirees and disabled contributors.

The Canadian Pension Plan is a monthly, taxable benefit that replaces part of your income when you retire. To avail the benefits of the CPP, the first thing you need to do is apply for it. You have to be over the age of 60 and with at least one valid contribution towards the CPP, in order to qualify.

According to Canada.ca, every person over the age of 18 who works in Canada and earns more than a minimum amount ($3,500 per year) must contribute to the CPP. If you have an employer, you pay a part of the contributions and your employer pays the rest. If you are self-employed, you make the whole contribution. You can contribute towards the CPP only until the age of 70, even if you continue to work after that age. 

How to apply for the CPP?

It takes typically 7-14 days to process an online CPP application and around 120 days to process applications delivered at Service Centre Canada or sent by mail.

After you complete this process, you start receiving payments on a monthly basis for the rest of your life. Your monthly payment will increase in January each year if there is an increase in the cost of living as measured by the Consumer Price Index. 

However, it will not decrease if the cost of living goes down. You need to understand that the CPP retirement pension is considered as income and is taxable.

How much can you expect to receive from the Canada Pension Plan?

The amount you receive from the Canada Pension Plan depends on several factors that include:

  • The age at which you start receiving the payment
  • The amount you have contributed
  • The length of your CPP contribution
  • The average earnings throughout your working life

According to Investopedia, to get maximum benefits Canadians must not only have contributed for 40 years to their CPP but also have contributed a sufficient amount in each of those years.

There are several other factors that can make a difference in the CPP retirement pension you receive. If you continue to work after the age of 65 and don’t receive your pension, the periods of low earning will be automatically replaced by periods of high earning after age 65 which will also increase the amount of pension.

Further, while calculating the base component of your pension, the Canada Revenue Agency automatically excludes up to 8 years of your lowest earnings, again increasing your pension amount. 

You can also look to delay your pension amount till the age of 70 and benefit from higher payouts in later years. Retirees delaying their pension after the age of 65 will receive an additional 0.7% per month or 8.4% per year. This means if you start CPP payments at the age of 70, your payouts will increase by 42%. 

The maximum monthly amount you can receive as a new recipient starting pension at age 65 via the CPP for 2020 is $1,175.83. The average monthly CPP amount for March 2020 is $696.56. 

Other Benefits of CPP

You can qualify for a monthly CPP post-retirement benefit if you continue to work while receiving your CPP retirement pension while under age 70 and decide to keep making contributions. 

For each year of contribution, you will get the additional post-retirement benefits. After the age of 65, you get the option to choose if you still want to contribute to your CPP and this will stop once you turn 70.

You can share your pension with your spouse or common-law partner. This will reduce the taxable income and you can save on your taxes. In case of a divorce, the credit will be split equally.

You are eligible for a monthly payment of $505.79 under the CPP disability benefit, which will be automatically converted into a post-retirement disability benefit after the age of 65. 

If a CPP contributor dies, you are eligible for a death benefit which is a one time, lump-sum payment to the estate of the deceived. If an estate doesn’t exist, the amount goes the person or institution that has paid for the funeral expenses, spouse or common-law partner, or the next-of-kin of the deceased.

The Bullish Takeaway

The Canada Pension Plan helps citizens to have a more relaxed and stable retirement life. You should definitely contribute towards a CPP as the invested money is definitely going to come back to you without any risk or loss involved.

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