CPP retirement pension changes may affect you

Feb 24, 2011

By Susan Irwin, Executive Director / Lawyer, Rural Legal Services

Some of us may suffer from retirement envy with no freedom 55 in sight. Others may thrive in the workforce and want to keep working, while others may have no option but to keep working long after age 65 in order to make ends meet.

Whatever group you fall into, new CPP rules being phased in through 2016 may have an impact on your retirement income and your decision about when to retire. According to Service Canada:

“The Canada Pension Plan is changing to better reflect how Canadians choose to live, work, and retire”.

Introduced amidst over much debate as to whether Canadians are saving enough for retirement and whether the Canada Pension Plan can withstand the aging tide of baby-boomers eligible to retire, the new rules are intended to give Canadians more options.

These changes will be especially important to those planning to apply for benefits before age 65, those who want to retire but still work part-time and those who either entered the workforce late or left for extended periods of time, perhaps to raise a family or return to school. If you have already left the workforce and are receiving CPP retirement benefits, the new rules will not apply to you. The changes also do not apply to the Quebec Pension Plan.

For the rest of us, more options can make retirement decisions more difficult unless we have and appreciate all the relevant information and facts. So what are the changes?

Early or Late Take-up Rules

Your monthly CPP retirement pension amount will increase by a larger percentage if you take it after age 65. The premium you will earn for delaying retirement until age 70 will gradually increase from 6% per year to 8.4% per year by 2013.

On the reverse side, the amount of your monthly CPP pension will decrease by a larger percentage if you take it before age 65. At present you can retire as early as age 60 but your monthly CPP retirement pension is reduced by .5% for each month before age 65 that you began receiving it. From 2012 to 2016, the percentage reduction will increase to .6% per month. It doesn’t sound like much but if in 2016 you retire at age 60, your CPP pension amount will be 36% less than it would have been if you retired at age 65.

Work Cessation Rules

Starting in 2012 it will no longer be necessary to stop working or significantly reduce your hours in order to collect CPP retirement benefits before age 65. You and your employer will be required to make mandatory CPP contributions but you will have the option of easing yourself into retirement by supplementing your income with early CPP retirement benefits while gradually reducing the hours that you work.

In 2012 for those who wish to continue working after age 65 you will have the option of continuing to make CPP contributions until age 70 while working and collecting a CPP retirement pension. If you decide to continue making contributions your employer will also be required to contribute to your “Post-Retirement Benefit”.

Average Career Earnings Rules

The amount of your monthly CPP retirement pension is based on the number of years you worked and made contributions to CPP, as well as how much you earned. Under the “general drop-out provision”, 15% of your lowest earnings are dropped in determining your average earnings and pension entitlement. Starting in 2012, the percentage of low earnings dropped from the calculation will increase to 16%, rising to 17% by 2014. These changes are intended to increase your benefit amount.

Still confused? Overwhelmed? When you decide to retire will be influenced by many factors: health, family, career and of course, the amount of your retirement income.

Service Canada has more information as to how the changes to CPP may affect your retirement plans including an on line Canadian Retirement Income Calculator that can be found at: servicecanada.gc.ca. For questions call Service Canada at 1-800-277-9914. You may also contact the clinic for more information.

Legalese is a column of general information and opinion on legal topics by the lawyers of Rural Legal Services, Box 359, Sharbot Lake, ON, K0H2P0, 613-279-3252, or 1-888-777-8916. This column is not intended to provide legal advice. You should contact a lawyer to determine your legal rights and obligations.