Getting to Know Canada’s Pension Plans (CPP)

There are a variety of reasons why many Canadian citizens are happy with life in Canada and why many choose to migrate here. The country ranks third in terms of good quality of life, there is an effective free health care system for its citizens, and education is free for citizens from kindergarten up until high school.

These factors, along with a strong economy, stable political environment, income equality, public safety, and good job prospects make it a great place to live for migrants and citizens alike.

But an often-overlooked factor for wanting to live in Canada or become a resident of Canada is the way the country takes care of its citizens. When they reach retirement age, citizens have the Canadian Pension Plan or CPP to look forward to receiving. So, how does the Canadian pension plan work? Is the Canada pension plan taxable?

What are the benefits of the Canada pension plan? In this article, Benefits and Pensions Monitor provides us with a closer look at this retirement plan. If you're one of the professionals who frequent this site, bookmark it and send it along to clients who have questions.

The Canada Pension Plan Basics

The Canadian Pension Plan or CPP is a monthly retirement pension given to qualified recipients.

Established in 1965, the CPP is treated as a taxable income that replaces a portion of the recipient’s employment income when they retire. The CPP also serves as a fund that disburses disability benefits for those eligible.

If you are a qualified recipient, you get to receive this pension for the rest of your life. But once the recipient dies, their beneficiaries get their death benefit.

What are the benefits of the Canada Pension Plan?

The CPP works as a partial replacement of income to contributors and their families in the event of retirement, disability or death. This statutory program is governed by the federal government and the provinces. It is enabled by the CPP legislation. However, there are eligibility criteria that plan contributors must meet to receive the CPP’s benefits.

Some of the many benefits include the following:

CPP Death Benefit

The death benefit from the Canada Pension Plan is a one-time payment that’s payable to the estate of the deceased contributor, or to other qualified beneficiaries. To qualify for the CPP death benefit, the contributor to the CPP must:

• Have made contributions for at least 1/3rd of the calendar years of their contributory period for the base CPP, but no less than 3 calendar years
• Have made CPP payments for at least 10 years

What if the deceased contributor worked and lived in Quebec?

If the deceased worked and resided in Quebec, they can and may have contributed to both the CPP and the QPP – the Quebec Pension Plan. In this case, their contributions to both the CPP and the QPP are combined and used as basis for their death benefit.

Beneficiaries of the deceased should also contact Retraite Quebec if the following conditions apply:

• the deceased only contributed to the Quebec Pension Plan
• they were living outside Canada and the last province of residence was Quebec
• they were living in Quebec at the time of death.

How much can you receive from the CPP death benefit?

The death benefit you can receive is $2,500 given as a single, one-time payment.

When should you apply for the death benefit and who must apply for it?

Those who would receive the death benefit should immediately apply for the death benefit as soon as the contributor passes away. Who should apply depends on a couple of factors:

If there is an estate -- then the one who is named executor in the will of the deceased, or an administrator named by the Court applies for the death benefit. The executor or administrator is required to apply for the benefit within 60 days of the contributor’s date of death.

If no estate exists – or if the executor/administrator has not yet applied for the death benefit, these are the other persons who may apply, according to priority:

• the person or institution that either paid for or is responsible for paying for the funeral expenses of the deceased
• the surviving spouse or common-law partner of the deceased
• The deceased’s closest next-of-kin

A deceased contributor’s guardian, registered trustee, or other legal representative may also apply for the death benefit. It should be noted that the application can be done by mail or phone, but not online.

What happens after I apply for a CPP death benefit?

Applicants of the CPP death benefit must wait for the application to be assessed and processed. This can take anywhere from 6 to 12 weeks to complete.

CPP Disability Benefits

Another benefit that contributors can get from the Canada Pension Plan is the disability benefit.

This is a monthly payment you receive if you are unable to work due to a disability.

To be eligible for this benefit, contributors to the CPP must:

• Be younger than 65
• Have made enough contributions to the CPP
• Have a disability that is long-term and potentially fatal
• Have a physical or mental disability that prevents you from working or getting gainful employment that may provide significant income

Retirees who develop a disability may also receive the CPP post-retirement disability benefit, if:

• They are aged 60 to 65
• Contributed enough to the CPP
• Have a disability that is long-term and potentially fatal
• Have a physical or mental disability that prevents you from working or getting gainful employment that may provide significant income
• Received the CPP retirement pension for over 15 months or became disabled after beginning to receive the retirement pension

These are only a sample of the many benefits of the CPP. You can check their website for the complete list of benefits contributors to the Canada Pension Plan can receive.

What is the difference between the CPP, OAS, and GIS?

The CPP is one of three types of pension plans that a Canadian citizen can get when they reach retirement. Here are short descriptions of each:

• The Canada Pension Plan (CPP) is a monthly pension payment given to Canadians who are now 60 years of age and older who have worked and made contributions to the CPP.
• The Old Age Security (OAS) are pension payments Canadians can receive if they are 65 or older and have lived in Canada for at least 10 years.
• The Guaranteed Income Supplement (GIS) is a pension benefit Canadians may be eligible to receive if they already receiving OAS payments and can be helpful for low-income earners.

When do you start to receive the CPP?

The standard practice is for recipients to get the CPP once they reach the age of 65. In some cases, it’s possible to start receiving the benefits of the CPP by as early as age 60 or as late as age 70. Should a qualified recipient of the CPP choose to get the benefits earlier, their monthly pension will be smaller. Conversely, recipients who choose to get the benefits later will have a larger monthly pension.

There is no benefit to choosing to receive the CPP past age 70; the maximum possible amount you can receive is determined by the time you reach age 70.

How long should you wait before collecting your CPP?

Potential retirees should keep in mind that the age at which they use the CPP determines the monthly pension amount they will receive. Refer to these important rules on the CPP:

• Before age 65: If you choose to start receiving CPP benefits before age 65, payments will decrease by 0.6% each month (or 7.2% per year), up to a maximum reduction of 36% if you start at age 60.
• After age 65: Should you decide to get CPP benefits after the age of 65, payments will increase by 0.7% each month (or by 8.4% per year), up to a maximum increase of 42% if you start at age 70 or older.

Remember also that the maximum age of 70 is the ceiling for the CPP, and your monthly amount does not increase any more even if you choose to get the CPP benefits beyond age 70.

How much can you expect to receive in your CPP when you retire?

The amount an individual contributor to the CPP can of course vary. This will depend on factors like:

• your age when you retire
• how much you contributed to the CPP
• amendments the Canadian government made to increase or decrease what you might receive from the CPP

If you have some of the relevant documents ready, such as:

• CPP Statement of Contributions or Quebec Pension Plan Statement of Participation
• financial information on your employer pension (if appropriate)
• recent RRSP statements
• statements for other savings that will provide ongoing monthly retirement income (annuities, foreign pensions; survivor pensions, etc.)

Then you may use this calculator provided by the Canadian government to estimate your monthly pension. This can only provide an estimate, and not the actual figure.

Here’s a short video from the Canadian government highlighting the eligibility, advantages, and other facts about the CPP.

Ways to Supplement your Canadian Pension

These days, $1 million is not enough to retire comfortably in Canada. There’s a growing problem of soon-to-be-retired Canadians putting off savings but still planning to retire at exactly 60.

Some analysts worry for their US counterparts, who also seem to be less concerned about their retirement savings than they ought to. So, how can you avoid the rude awakening of not having enough money during retirement? One way is for you to supplement or increase your retirement income with these employer-sponsored, voluntary plans:

1. Defined contribution pension plan

As the name suggests, this type of pension plan means you know exactly how much you’ll pay for the plan. The main caveat is that plan holders will not know how much they’ll receive upon retirement.

Typically, the plan holder and their employer pay a defined amount into this pension plan each year.

The money is then invested in one or more financial products on the plan holder’s behalf, and the plan holder may also choose how their money is invested. The amount they get upon retirement depends on how the plan is managed and how the investments perform.

2. Defined benefit pension plans

In this type of plan, the employer promises to pay the plan holder a regular income once they retire. Due to the rising costs of living and economic uncertainty, this is one type of retirement plan that could be gaining more popularity among younger workers.

Usually both the plan holder and their employer contribute to the plan. If you choose this plan, your contributions are pooled into a fund. Your employer or a pension plan administrator then invests and manages the fund.

One of the benefits of this plan is that you don’t have to make any investment choices. The income you get when you retire is usually calculated based on your salary and the number of years you contributed to the plan. One drawback to this pension plan is that it’s a set amount that doesn’t reflect investment performance, which can be disadvantageous if the investments did well.

3. Pooled registered pension plans

Pooled Registered Pension Plans (PRPPs) work best for those who don’t typically receive a workplace pension. These include employees of small-sized and medium-sized businesses and self-employed individuals.

PRPPs are a lot like defined contribution pension plans where you and your employer contribute to your pension. But with PRPPs, your employer doesn’t have to add money to the plan; it’s completely voluntary.  You also have the option to not participate in your employer’s PRPP. The money in it is invested in one or more products on your behalf. The amount you get when you retire depends largely on the investments’ performance.

4. Voluntary Retirement Savings Plans

If you were or are employed in Quebec, you can be eligible to participate in a Voluntary Retirement Savings Plan. Like PRPPs, these plans are made available to employees who don’t typically have access to a workplace pension and to anyone who is self-employed.

5. Group Registered Retirement Savings Plans

Group Registered Retirement Savings Plans or group RRSPs is yet another type of employer-sponsored savings plan. The way it works is by opening an individual RRSP but contributing to it via your employer.

As with the usual RRSP, group RRSPs are funded by regular deductions from your paycheque.

Your employer may also contribute to your RRSP on your behalf.

How much can I receive as my CPP monthly pension?

Receiving your CPP pension at age 65 in 2024 will get you $1,364.60 monthly. The average monthly amount paid for a new retirement pension (at age 65) in January of 2024 was $831.92. These amounts are the maximum possible amounts, but they do not apply to everyone. Remember that your financial situation largely determines how much you’ll receive.

The CPP is a great benefit that is afforded to a vast majority of Canadians. Those who wish to have a comfortable retirement should consult their financial advisors as to how they can maximize this benefit. However, it’s wise not to rely completely on the CPP when you retire, since it’s only designed to replace around 33% of your pre-retirement income. Consult your advisor also on other ways to supplement your savings and income for your retirement, or find one now in our best in pensions and benefits section

Do you think you’ll have enough saved for retirement? What other retirement plans or investments will you use? Share in the comments what your plans are for supplementing your CPP income.