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04/12 - W. Michael Thomas
CFP, CLU, GBA, RPA, CH.F.C., R.F.P.


Changes to the Canada Pension Plan

The Government of Canada will gradually introduce changes to the Canadian Pension Plan (CPP) from 2011- 2016.

Before the changes, your CPP retirement pension increased by 0.5% for each month after age 65 (and up to age 70) that you delayed receiving it. This meant that, if you started receiving your CPP pension at 70, your pension amount was 30% more than it would have been if you had taken it at 65.

For 2011 to 2013, the Government of Canada will gradually increase this percentage from 0.5% per month (6% per year) to 0.7% per month (8.4% per year). This means that, by 2013, if you start receiving your CPP Pension at the age of 70, your pension amount will be 42% more than it would have been if you had taken it at 65.

Before the changes, your CPP retirement pension was reduced by 0.5% for each month before age 65 that you began receiving it. This meant that, if you started receiving your CPP pension at 60, your pension amount was 30% less than it would have been if you had waited to take it at 65.

From 2012 to 2016, the Government will gradually change this early pension reduction from 0.5% to 0.6% per month. This means, that by 2016, if you start receiving your CPP pension at the age of 60, your pension amount will be 36% less than it would have been if you had taken it at 65.

These changes will affect you if you are:

  • An employee who contributes to the CPP, whether you are just starting your career or you are planning to retire soon;
  • A self-employed person who contributes to the CPP; or
  • Between the ages of 60 and 70 and you work while receiving your CPP retirement pension (or if you work outside of Quebec while receiving a QPP retirement pension).

You will not be affected by these changes if you started receiving a CPP retirement pension before December 31, 2010, and you remain out of the work force.

Note: The changes will affect employers who contribute to the CPP on behalf of their employees.

Before the change, if you were receiving a CPP retirement pension and working, regardless of your age, you did not pay CPP contributions.

Starting in 2012, if you are under age 65 and you work while receiving your CPP retirement pension, you and your employer will have to make mandatory CPP contributions. These contributions go towards the new Post-Retirement Benefit (PRB), which is effective January 1 of the year following your PRB contribution.

This additional benefit will be added to your current retirement benefit, gradually increasing your retirement income
.

Before the change, if you were receiving a CPP retirement pension and working, regardless of your age, you did not pay CPP contributions.

Starting in 2012, if you are age 65 to 70 and you work while receiving your CPP retirement pension, you can either choose to make CPP contributions or you can opt out of making these contributions. If you decide to make the contributions, your employer will also have to make CPP contributions.

These contributions allow you to continue to build your CPP Post-Retirement Benefit, even if you are already receiving the maximum CPP pension amount
.

Before the changes, when Service Canada calculated your average earnings over your contributory period, 15% of your lowest earnings were automatically dropped. This is called the “general drop-out provision.” Under this provision, up to 7 years of your lowest earnings were automatically dropped from the calculation of your average earnings.

Starting in 2012, the percentage of low earnings will increase to 16%, allowing up to 7.5 years of your lowest earnings to be dropped from the calculation, which will likely increase your benefit amount. In 2014, the percentage will increase again to 17%, allowing up to 8 years of your lowest earnings to be dropped from the calculation.

Note: This change benefits all contributors who are eligible for CPP benefits in 2012 or later.

Before the change, if you decided to take your CPP retirement pension before age 65, you had to either stop working or significantly reduce your earnings for at least two months. This requirement was called the “work cessation test.” After this two-month period, you could return to work or start earning more.

Starting in 2012, the work cessation test will no longer apply. This means that you will be able to take your CPP retirement pension as early as age 60 without having to stop working or reduce your earnings. For many Canadians, retirement is a process that often occurs in stages, rather than a one-time event. By eliminating the work cessation test, it will be easier for Canadians to make a phased-in transition to retirement.

Service Canada has online resources, including the Canadian Retirement Income Calculator, to help you plan your future. Go to www.servicecanada.gc.ca – then select ‘Life Events’ from the left column and click ‘Retirement Planning.

Note: The CPP operates throughout Canada, except in Quebec, where the Quebec Pension Plan (QPP) provides benefits. These changes do not apply to the QPP. For information about the QPP, visit the QPP Website at www.rrq.gouv.qc.ca

 

W. Michael Thomas is a Partner at The Investment Guild (the Investment Guild is a People Corporation company)


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