Changes to Canada Pension Plan (CPP)

CPP – Canada Pension Plan - Recent Changes

Since the late 60’s the CPP has been in place to provide a Base Pension Income for all working Canadians.

Up until 2012 the rules were pretty simple:

  • Make your annual Contribution through payroll deduction;

  • Your Employer then matched these contributions on a 1 to 1 basis;

  • At age 65 you would be able to collect 100% of your ‘eligible’ CPP pension based on your history of contributions;

  • If you wanted to start your CPP pension as early as age 60 you could.

This meant an early pension reduction of ½% per month or 6% per year (to not earlier than age 60).

At age 60 this would mean receiving an early CPP of 70% (100% less (6% times five years) for 30% = 70%)

You could start your early pension anytime between age 60 and 65 as long as you met their conditions

CONDITIONS:

Normally these were limited to either you were no longer working OR (if your employer was agreeable) then you could stop work for 2 months and receive ZERO income, then restart work and become CPP exempt.

Once you obtained exempt status from Service Canada this meant you could receive your CPP pension but there was no longer any need to make ongoing CPP contributions.

STATISTICS: According to Government provided information people commence their pensions as follows:

  • 65% of people currently start between ages 60 & 64

  • 31% start at 65

  • 4% start after 65

Why the NEW RULES:

  • The government has found that more people are requesting early retirement than had been originally expected.

  • The CPP Plan is being modified as a result.

  • In essence, too much money was coming out of the plan early so they are implementing new rules to slow that down.

THE NEW RULES: Simplified

  • You will still be able to retire early at age 60 BUT the annual reduction for early retirement is going to be 7.2% from the current 6%.

  • This means an early age 60 pension in 2016 will be 64% of the eligible amount, not 70%.

  • Here are the changes for age 60 in:

  • 2012 = 68.8%

  • 2013 = 67.6%

  • 2014 = 66.4%

  • 2015 = 65.2%

  • 2016 = 64%

  • They will allow people who are currently working to start their CPP pension early BUT they must continue to pay CPP premiums until they stop working.

  • These additional CPP premiums by you and your employer will accrue additional CPP benefits for you.

  • CPP premiums would be mandatory up to age 65 but would be Voluntary if you are still working until age 70.

  • You will no longer need to stop working for two months in order to start your CPP Pension between ages 60 to 65.

  • There is an enhancement (increase) to the CPP amount of 1/40th of your CPP payment for every year you continue working.

  • This gets topped up when you finally retire.

  • The CPP Exempt provision will essentially disappear. If you earn salary and/or bonus you will pay CPP premiums

NOTE: If you start your CPP after age 65 then there is another enhancement (increase) to your CPP. For every year after age 65 your pension will increase by 7.2% per year not by the previous 6%.

BUSINESS OWNER:

If you are a BUSINESS OWNER and want to receive your CPP and stop both your personal and Corporate CPP contributions then the secret will be to take Dividends in lieu of salary.

Dividends are not subject to CPP contributions, whereas Salary and cash bonuses are.

Also remember, if previously ‘CPP exempt’ employees are still working with your company then starting in 2012 you will have to restart staff CPP deductions and then provide the company’s premium matching.

OTHER:

There are changes in the number of low income years that get dropped from the CPP pension determination.

This was always part of the formula but this has been enhanced. The lowest 15% of your working /CPP contribution years get dropped in the calculation leaving everyone with a slightly higher CPP than they otherwise would have gotten. This will change to 17% of your lowest years.

If you currently receive a CPP Pension there will be no impact to your current pension.

Employees who are receiving CPP payments but have returned to the workplace or are currently working will pay CPP premiums in the future.

Overall, the Government has attempted to modernize the CPP plan and make it more equitable for all contributors.

The ability to continue working and also receive CPP pensions is one way the Government is encouraging older workers to stay in the workplace but not necessarily work the full 35 or 40 hour week.

CHILD REARING PROVISION:

For those with children there has always been a special provision to help increase your CPP pension.

The Government factors into your CPP calculation that you had children. They allot you 7 years per child but do not take into consideration any overlapping years. For example: if you had two children born 3 years apart your would be eligible for 10 years of consideration: 7 years for the first child and 3 additional years for the second child. In this example 4 years are overlapping and only count once.

In essence, they will give you OR your spouse a slightly increased CPP pension for having raised children.

They assume one parent would have taken themselves out of the workplace so this leads to an upward adjustment in your final CPP pension calculation.

GENERAL COMMENTS:

Please keep the following points in mind:

  • If you have a family history where living past age 80 is in question then you might want to consider taking an early CPP pension.

  • The breakeven point for the income you receive from ages 60 to 65 is about age 80.

  • If you have a family history where everyone lives to well over 80 then you might consider waiting to start your CPP.

  • Other personal factors may influence whether you take an early CPP pension or not.

  • There are CPP survivor benefits for spouses, etc. and a small $2,500 Death Benefit.

PHASE IN PERIOD:

The Government started phasing-in these changes in 2012.

The 6% annual reduction for early pensions will grow proportionally starting in 2012 at 20% and be 100% in effect for 2016.

If you are or will be in the 60 to 65 age category (or know of someone who will be) then you should review what this transition may mean to you. If you require more information you may contact: SERVICE CANDA at: 1- 800- 277- 9914 (ENG)

OR

http://www.servicecanada.gc.ca/eng/home.shtml OR Feel free to contact me directly.

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