Starting on January 1, 2012 there are significant changes to the Canada Pension Plan (CPP).
A smaller pension if you retire early
The retirement age remains at 65. Until now anyone who had reached the age of 60 and had ceased, or significantly reduced, their employment for two months could start drawing a pension from the CPP. The pension they received was reduced by 0.5% for each month before the age of 65. A person who started drawing their CPP at exactly aged 60 would have their pension reduced by 30%.
Between 2012 and 2016 the reduction will increase to 0.6% per month so that someone drawing their CPP at age 60 will have their pension reduced by 36%. It will no longer be necessary to cease work for two months in order to qualify for a pension.
A larger pension if you retire later
Under the old system a CPP pension was increased by 0.5% for each month the pensioner delayed drawing their pension after 65 and up to 70 years old. Under the new system the pension will be increased by 0.6% then 0.7%. By delaying drawing a pension until age 70 a pensioner can have their pension increased by up to 42% instead of 30% under the old system.
CPP contributions
Another significant change is CPP contributions. Under the old system a pension receiving a CPP pension did not pay CPP contributions even if the returned to pensionable employment or self-employment. The new rule is that all people in pensionable employment (or self-employment) under the age of 65 must pay CPP contributions. Between the ages of 65 and 70 a person can chose to opt out of paying CPP contributions.
An employee opts out by completing form CPT30 and sending this to the Canada Revenue Agency. They must give a copy of the form to their employer(s).
A self-employed worker opts out by completing schedule 8 on their tax return for the year.
Note that a pensioner cannot opt out retrospectively so an employee must file their option in the month before they wish to opt out. It will be possible to revoke a decision to opt out in a subsequent year.
Increased pension as a result of additional CPP contributions
As noted above, a person who draws their pension at aged 60 will have the amount reduced by 36%. However, if they carry on working they will continue to pay CPP contributions. Therefore, each year the amount of pension they receive will be recalculated. The 0.6% per month “reduction” will be reduced to reflect the additional months of CPP paid. This recalculation will be done for each year the pensioner pays CPP contributions.
Employers
Employers are responsible for deducting and remitting the correct amount of CPP premiums. Therefore they should ensure:
· 1 They know their employee’s dates of birth.
· 2 Ask for proof if an employee says they are receiving a CPP (or QPP) retirement pension
· 3 Ask an employee over 65 if they have filed an election to stop contributing to the CPP and, if so, get a copy of the election.
Existing CPP pensions
Anyone who started drawing their CPP pension before December 31, 2010 will be unaffected by these changes. However, pensions started in 2011 will be subject to the above rules.
Conclusion
The decision on when to start drawing a CPP pension will now need careful and individual consideration.
A smaller pension if you retire early
The retirement age remains at 65. Until now anyone who had reached the age of 60 and had ceased, or significantly reduced, their employment for two months could start drawing a pension from the CPP. The pension they received was reduced by 0.5% for each month before the age of 65. A person who started drawing their CPP at exactly aged 60 would have their pension reduced by 30%.
Between 2012 and 2016 the reduction will increase to 0.6% per month so that someone drawing their CPP at age 60 will have their pension reduced by 36%. It will no longer be necessary to cease work for two months in order to qualify for a pension.
A larger pension if you retire later
Under the old system a CPP pension was increased by 0.5% for each month the pensioner delayed drawing their pension after 65 and up to 70 years old. Under the new system the pension will be increased by 0.6% then 0.7%. By delaying drawing a pension until age 70 a pensioner can have their pension increased by up to 42% instead of 30% under the old system.
CPP contributions
Another significant change is CPP contributions. Under the old system a pension receiving a CPP pension did not pay CPP contributions even if the returned to pensionable employment or self-employment. The new rule is that all people in pensionable employment (or self-employment) under the age of 65 must pay CPP contributions. Between the ages of 65 and 70 a person can chose to opt out of paying CPP contributions.
An employee opts out by completing form CPT30 and sending this to the Canada Revenue Agency. They must give a copy of the form to their employer(s).
A self-employed worker opts out by completing schedule 8 on their tax return for the year.
Note that a pensioner cannot opt out retrospectively so an employee must file their option in the month before they wish to opt out. It will be possible to revoke a decision to opt out in a subsequent year.
Increased pension as a result of additional CPP contributions
As noted above, a person who draws their pension at aged 60 will have the amount reduced by 36%. However, if they carry on working they will continue to pay CPP contributions. Therefore, each year the amount of pension they receive will be recalculated. The 0.6% per month “reduction” will be reduced to reflect the additional months of CPP paid. This recalculation will be done for each year the pensioner pays CPP contributions.
Employers
Employers are responsible for deducting and remitting the correct amount of CPP premiums. Therefore they should ensure:
· 1 They know their employee’s dates of birth.
· 2 Ask for proof if an employee says they are receiving a CPP (or QPP) retirement pension
· 3 Ask an employee over 65 if they have filed an election to stop contributing to the CPP and, if so, get a copy of the election.
Existing CPP pensions
Anyone who started drawing their CPP pension before December 31, 2010 will be unaffected by these changes. However, pensions started in 2011 will be subject to the above rules.
Conclusion
The decision on when to start drawing a CPP pension will now need careful and individual consideration.
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