Why Relying on the Canada Pension Plan (CPP) Could Leave Your Retirement Dreams Short —With Average Payments at Just $816.52/Month!

When planning for retirement in Canada, the Canada Pension Plan (CPP) is a crucial component that you simply cannot overlook. Whether retirement is just around the corner or still years away, the CPP will likely play a significant role in your retirement income. How substantial that role will be depends on various factors, including when you choose to start receiving benefits and how much you’ve contributed over your working life.

At AJ Wealth Management, we understand that you might have questions about maximizing your CPP benefits. When should you apply? How are the payments structured? And importantly, are CPP payments taxable? We’ll cover these points and more below, but first, let’s start with a quick overview of how the CPP works.

Understanding the Canada Pension Plan (CPP)

The CPP is a retirement pension that provides a steady source of income once you retire. It’s part of Canada’s multi-layered retirement income system, which also includes Old Age Security (OAS), the Guaranteed Income Supplement (GIS), and your personal savings. Unlike some government programs, the CPP is funded entirely by contributions from workers, employers, and self-employed individuals, not by the government itself.

Participation in the CPP is mandatory for all Canadian workers and employers, ensuring that nearly everyone contributes. If you live in Quebec, the Quebec Pension Plan (QPP) serves the same purpose. Below are the CPP payment dates for the remainder of 2024.

Tip: At AJ Wealth Management, we can help you plan your retirement strategies to maximize into a broader retirement plan ensuring you’re fully prepared.

How is the CPP Funded?

Unlike OAS and GIS, which are funded by general tax revenues, the CPP is supported by contributions from employees, employers, and the self-employed. These contributions are deducted directly from your paycheque and invested to grow the fund. If you’re self-employed, your CPP contributions are calculated based on your net business income and included in your tax bill.

Starting in 2019, CPP contributions have been gradually increasing as part of a seven-year plan to enhance retirement benefits. Curious about how this affects your financial plan? Reach out to AJ Wealth Management for personalized plans at no cost to you.

Managing CPP Investments

The investments of the CPP are managed by CPP Investments, a Crown corporation that operates independently of the government. Every three years, the Office of the Chief Actuary of Canada evaluates the sustainability of the CPP, and the next review is scheduled for 2025. According to CPP Investments, the plan is expected to be financially sustainable for at least the next 75 years.

Are You Eligible for CPP?

If you’re at least 60 years old and have made at least one contribution to the CPP, you’re eligible to receive benefits. Even if you’ve received CPP credits from a former partner or spouse who contributed to the plan, you might still qualify. CPP benefits are available to Canadian citizens, permanent residents, legal residents, or landed immigrants.

When to Apply for CPP

You can start receiving your CPP benefits anytime between the ages of 60 and 70. However, the earlier you start, the lower your monthly payments will be. Many Canadians choose to begin receiving their CPP at age 65, but delaying it can lead to higher payouts.

Deciding when to start receiving your CPP can be complex, and it’s important to consider your overall retirement goals.

How Much Will You Receive?

Your monthly CPP payment is determined by several factors:

Your age when you begin receiving benefits
The length and amount of your contributions to the CPP
Your average annual earnings throughout your working life

In 2024, the maximum monthly amount for those starting their pension at age 65 is $1,364.60, while the average monthly payment for new retirees in April 2024 was $816.52.

Applying for CPP Benefits

You can apply for CPP benefits online through your My Service Canada Account or by downloading a paper application. Keep in mind that it can take up to four months to process your application. Direct deposit is the quickest way to receive your payments, but cheques are also an option.

Are CPP Payments Taxable?

Yes, CPP payments are considered taxable income. You can request that the Canada Revenue Agency (CRA) deduct federal income tax from each payment, either through your My Service Canada Account or by submitting a request form. If you don’t arrange for tax deductions, you may have to pay income tax quarterly.

Tax planning is a key part of your retirement strategy. Contact AJ Wealth Management to discuss how CPP payments fit into your overall tax plan when you retire.