Family Finance

The New Year will usher in the first changes to the CPP

Beginning on January 1 2011, a major overhaul of the Canada Pension Plan will begin, which could affect the amount of money you receive in retirement.

Any individual who contributed to the Canada Pension Plan (CPP) at any time after age 18 and who was working in Canada, is eligible to receive (or may already be receiving) CPP benefits. Pension payments can begin as early as 60 or as late as 70, but the normal retirement age is 65.

Benefits at age 60, 65 or 70?

The CPP is meant to replace approximately 25% of your average earnings to a set maximum. So the question is: when should you start collecting the CPP.

If you start at 60, under the current rules you would receive 30% less (.5% per month) compared to what you would at 65. On the opposite end, there is a 30% increase in benefits (.5% per month) if you wait until 70.

Under the new rules, beginning in 2011 the late pension augmentation will be gradually increased to .7% per month for each month you wait to take your pension after age 65. The end result, which is being phased in over the next three years, will eventually increase your pension at 70 by 42%. The first increase in 2011 is .57% per month (a 34.2% increase).

In 2011 taking an early pension at 60 will continue to result in a reduction of 30%. However, beginning in 2012, taking your pension at 60 will mean a reduction in benefits of 31.2% – by 2016 that reduction will be 36%.

Another aspect to consider under the existing rules, is that once you begin to receive the CPP or reach 70 you can no longer contribute to the plan even though you are continuing to work. Also, in order to begin receiving CPP benefits, you must not be working.

These rules are also changing. As of January 1, 2012 if you are under 65 and working you and your employer will have to continue CPP contributions until you are 65. But you can choose to continue to contribute until you reach 70. You will also be able to continue to work and apply for your CPP at the same time.

Will this affect your benefit? Absolutely. Any additional contributions you make will be added to your existing benefit the following year. For example, if you start contributing again in 2012, your 2013 benefit will be increased. The exact amount of the increase depends on your earnings level and can be a maximum of 2.5% of the maximum pension amount.

This may be a problem if you are self-employed because you or your corporation must continue to make the employer and the employee contributions.

Only the employee portion will be used to increase your benefits. Although you or your company can continue to deduct the expense, the total benefit to you as an employee will only be affected by your individual contribution.

This means that 4.95% will be paid in employer and employee contributions, but only 2.5% of the contributions will be used to increase the employee's benefit. This change will affect anyone who is receiving benefits as of 2012, is under age 65 and continuing to work.

To ensure you use the CPP strategy that is best for you, speak to your financial advisor.