Some Canadians want to retire early, while others wish to keep working past age 65. Many more wish to ease into retirement and work part time. Regardless of your individual circumstances the following changes will affect most Canadians.
On December 15, 2009 Bill C-51 received Royal Assent. This Bill will change the rules regarding the Canada Pension Plan, CPP. These changes will become effective between 2011 and 2014.
If you are currently collecting CPP retirement, disability or survivor benefits or will begin collecting your pension prior to 2012, you will not be affected by these changes unless you are a CPP recipient who continues to work. The Quebec Pension Plan (QPP) is very similar but not identical. This brief deals strictly with the CPP.
1) Pension Adjustments for early and late CPP pensions
Possibly the biggest change is an increased incentive to wait to collect until you are 65, or at the latest, age 70. Currently, the age for Canadians to begin receiving CPP benefits is 65. It is possible to receive a reduced CPP as early as age 60, even if you continue to work.
Currently the reduction is 0.5% per month. The early pension reduction will gradually increase to 0.6% over a 5-year period starting in 2012 for each month that the pension is taken before age 65. The late pension augmentation will gradually increase to 0.7% per month for each month that the pension is taken after age 65, up to age 70. This will be phased in over 3 years, starting in 2011.
2) Continued CPP participation while receiving benefits
Currently, CPP contributions are no longer paid once you begin receiving a CPP retirement pension, or once you reach age 70, whichever is earlier. With the changes, a person under 65 who chooses to receive CPP benefits may continue working and thus continue to earn CPP benefits, but will be required to continue contributing to the CPP until age 65.
Although this could cost working retirees hundreds of dollars more a year in payroll deductions, these contributions will result in increased retirement benefits. The exact amount depends on the earnings level of the contributor. Additional CPP pension ‘purchased’ in any one year will commence in the following year, subject to any applicable early retirement reduction. The effective date of this change is 2011.
3) Change in calculating average career earnings
The CPP uses a career average calculation which allows for certain years of low or no earnings to be disregarded in arriving at average earnings. If you take the CPP at age 65, the span of your career is considered to be 47 years. If the CPP is taken at age 60, the span of your career is considered to be 42 years.
Currently, 15% of an employee’s potential working career may be disregarded. Under the new rules, the drop-out percentage will be increased as follows: 16%, in 2012 to allow a maximum of 7.5 years to be dropped, based on a working career of 47 years (age 18 to 65) and 17% in 2014 to allow a maximum of eight years to be dropped.
This change will also increase the average CPP disability and survivor pensions, which are based on the retirement benefit calculation.
4) Removal of the Work Cessation Test
Under current rules, in order to qualify for a CPP benefit before age 65, you must not earn more than a certain amount in the month the CPP pension commences or the month before. Currently this amount is approximately $900. This earnings test is referred to by the government as the “Work Cessation Test”.
Under the new rules, the Work Cessation Test will be removed for employees who commence their CPP pension in 2012 and later. However, as discussed earlier, employees under the age of 65 will be required to continue to contribute while working, in return for an increased benefit.
For more information, speak to your trusted financial advisor, or log on to the CPP website at http://www.servicecanada.gc.ca/eng/isp/cpp/cpptoc.shtml
The foregoing is for general information purposes and is the opinion of the writer. This information is not intended to provide personal advice including, without limitation, investment, financial, legal, accounting or tax advice. Please call or write to Rick Sutherland CLU, CFP, FDS, R.F.P., to discuss your particular circumstances or suggest a topic for future articles at 613-798-2421 or E-mail firstname.lastname@example.org.