Throughout the course of your employment, you may wonder what retirement plans are available to you so that you can live comfortably once you stop working. Well, luckily the Government of Canada gives all Canadians a choice to contribute to the Canadian Pension Plan. But what is the CPP and how does it work?
The Canadian Pension Plan (CPP): a summary
The CPP is a monthly benefit that will replace your wages once you stop working. It is taxable, and should you meet the CPP qualifications, you will receive it for the rest of your life after retirement. It is not a benefit that you will automatically receive once you retire. You must apply it before you want you pension to start — usually at least six months ahead of time. Unlike other benefits like Old Age Security, the CPP requires that you contribute to the plan while you are still an employee. This means that with each paycheque, you will contribute an amount to the CPP. Whatever you receive upon retirement depends entirely on how much you contributed as well as the amount of years you have contributed to the plan.
Qualifications
Unlike other benefits, the CPP doesn’t have a vast array of requirements in order to qualify for it. There are only 2 requirements:
- You must be 60 years of age or older
- You must have made at least one valid contribution to the CPP during your employment
This isn’t to say that if you make a single contribution, you’ll receive an adequate amount upon retirement — but you will qualify. Moreover, you may qualify for the Canadian Pension Plan if your spouse has contributed to the plan. This is known as Pension Sharing or Partition of Benefits. In order to qualify for pension sharing, you must meet the following qualifications:
- You must be living with your spouse or common-law partner
- You or your partner must have contributed and applied for the plan
When and how much you can receive
You can start receiving the Canadian Pension Plan as soon as you turn 60 years of age, however the standard age to receive it is 65. If you do decide to receive it prior to the age of 65, then your monthly amount will be smaller until you turn 65. If you decide to wait until age 70, then your monthly amount will be bigger. Once you reach 70 years of age, you will receive your maximum monthly amount. This means that waiting until after you turn 70 won’t make any difference to the amount you will receive.
As mentioned above, there are different factors that come into play when it comes to the amount you will actually receive upon retirement:
- The first is age,
- The second depends on how much you have contributed to the plan throughout your years of employment, and
- The third is the amount of years you have contributed to the plan.
In 2022, the maximum monthly amount you can receive after the age of 65 is $1,253.59. The maximum monthly amount you can receive after the age of 70 is $1,780.10. This isn’t to say that you can expect to receive this amount. On average, those over the age of 65 will receive around $727.61, and those over the age of 70 will receive around $997. If you receive the maximum amount, that means that you and your employer have contributed the maximum yearly amount for 39 of the 47 years between ages 18-65.
Canadian Pension Plan (CPP) rates and maximums
Every year, the government of Canada will set rates as well as maximums and minimums for the Canadian Pension Plan. These numbers will vary from year to year and will determine just how much employers and employees can contribute to the plan. Below are some definitions you need to know as well as the rates, maximums, and minimums for the year 2022.
Contribution rate
The contribution rate is the rate at which employers and employees will contribute to the CPP. The contribution rate for the year 2022 is 5.7% of the employee’s salary for the employer as well as the employee.
Maximum contribution
The maximum contribution is the maximum amount an employee and an employer can contribute to the Canadian Pension Plan. In 2022, the maximum contribution amounts to $3,499.80 for both employers and employees — for a total of $6,999.60. This is why, if you are self-employed, the maximum annual contribution is $6,999.60.
Basic exemption amount
This is the amount an employee will have to earn before they can start making contributions to the Canadian Pension Plan. In 2022, the basic exemption amount is $3,500 — it hasn’t changed over the last 10+ years. This means that employees and employers will not have to contribute to the CPP for the first $3,500$ of an employee’s salary.
Maximum annual pensionable and maximum contributory earnings
The year’s maximum pensionable earnings (YMPE) is the amount the federal government sets on which you need to contribute to the CPP. The maximum contributory earnings is the amount on which you’re allowed to contribute to the CPP. In 2022, the YMPE is set at $64,900 and the maximum contributory earnings are set to $61,400.
For example, if an employee makes $75,000 for the year, their YMPE is $64,900. Because the basic exemption amount is $3,500, that means their maximum contributory earnings becomes $61,400. They cannot contribute for the extra income they make. Similarly, if an employee has an income of $55,000, then their YMPE is $55,000, but their maximum contributory earnings becomes $51,500.
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