Demystifying the Canada and Quebec Pension Plans

You’ve been contributing for years, but do you know what you’ll get?

FOR CANADIANS AT OR NEARING RETIREMENT, the Canada Pension Plan and Quebec Pension Plan (CPP/QPP) may be a bit of a mystery. Many people realize they’ve been contributing to a government pension  plan for a good portion of their lives, but may not be sure how much they will receive at retirement.

Furthermore, there is often some confusion as to whether it is a better strategy to begin drawing pension income early at age 60, or to wait until age 65. Below are four facts about how benefits are calculated that may shed light on the system and help you determine the best course of action for your situation.

Fact #1: Your pension is based on your earnings – and your lowest‑earning years are excluded.

Generally, a pension benefit is calculated based on your earnings

and a predefined contributory period. Earnings are adjusted to bring them in line with the growth in wages over the years. There is also a dropout period for years with low reported earnings. Under CPP, up to eight of your lowest‑earning years (17 per cent of the contributory period) are automatically removed from the calculation for your retirement pension. This is in addition to the child‑rearing dropout provision, which allows you to remove years when raising a child under the age of seven reduced your earnings. QPP offers a similar dropout provision: up to 15 per cent of the contributory 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 government for a child under seven.

Fact #2: Take CPP/QPP early and you will receive less.

You can start collecting a CPP/QPP retirement pension as early as age 60. However, if you begin taking either pension early, your benefit will be reduced by 0.6 per cent per month until your 65th birthday. The maximum reduction is 36 per cent. For example, if you would qualify for a $1,000  monthly pension at age 65, but take it at age 60, you would receive $640 a month.

You can also choose to receive your CPP or QPP early, while you still work. If you do so, you are required to continue to contribute to CPP/QPP until age 65.1 These additional contributions will result in an increased  annual pension benefit, known as the “post‑retirement benefit” or, under QPP, the “retirement pension supplement.” This benefit increases your retirement pension even if you are already receiving the maximum regular pension payable and continues to increase as long as you make  contributions.

Fact #3: Take CPP/QPP later and you will receive more.

If you start receiving your CPP/QPP retirement pension after age 65, it will 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. So, if you would qualify for a $1,000 monthly pension at age 65, but take it starting at age 70, you would receive $1,420 a month. If you continue to work between the ages of 65 and 70, you will automatically be subject to CPP/ QPP premiums. You may opt out of paying CPP premiums, but not QPP premiums. To opt out of paying CPP premiums, complete Form CPT30 – Election to Stop Contributing to the Canada Pension Plan, or Revocation of a Prior Election (www.canada.ca/en/revenue-agency/services/formspublications/forms/cpt30.html).

Fact #4: There is a death benefit and a survivor’s benefit – up to a maximum amount.

The CPP/QPP death benefit consists of a lump sum payment of up to $2,5002 and a survivor’s benefit. However, if the spouse is already receiving a CPP retirement benefit, the maximum monthly amount (retirement plus survivor benefit) cannot exceed the maximum retirement benefit. This rule applies for QPP when the surviving spouse is 65 or older; however, if the surviving spouse is under 65, it is possible for the combined benefit to exceed the maximum retirement benefit.

If there is no spouse or minor child,the only benefit paid is the small lump sum benefit. This would be paid to the estate or next of kin.If you continue to work and contribute after beginning to receive your CPP pension (whether before or after age 65), the post‑retirement benefit will not be included for survivor or disability benefits, nor for pension sharing or credit splitting purposes on marriage breakdown. 

With QPP, the retirement pension supplement is included in survivor benefits, but not 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.

Determining when to collect CPP/QPP

If you are unsure of whether to take CPP/QPP at 60 or wait until 65, consider the following questions: Have you stopped working? It generally makes sense to take CPP/QPP early if you have stopped working. The contributory period continues until you start drawing the pension or age 70, whichever is earlier. If you are no longer contributing, the zero earnings during the non‑contributory period before starting your pension may lower the overall benefit collected even if you wait 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 your retirement pension commences may impact the amount of survivor’s pension you receive going forward. Obtain an estimate for your combined payment before taking your own retirement pension to understand what adjustments, if any, will be made to your current survivor’s pension.

Are you single? Because your heirs will receive no death benefit other than the small lump sum amount, you may want to take CPP/QPP early, unless you have an above‑average life expectancy, to ensure you get as much out of the plan as possible. 

Do you have health concerns? If you qualify for a disability benefit, it is better to apply for that benefit since it is higher than the retirement benefit.

However, if you do not qualify for the disability benefit and your health issues will have an impact on your life expectancy, you should consider applying for the early retirement benefit.

Are you healthy and continuing to work? If yes, postponing taking the pension and continuing to contribute will result in a greater retirement pension and a larger total amount collected from the plan. The amount received from the plan depends on an individual’s life expectancy; in general, life expectancy is predicted to continue to increase.4 

Making an informed decision

If you qualify for a CPP/QPP pension, you can request a quote for how much you will receive if you begin collecting at age 60, and how much you’ll receive 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.