CPP post-retirement benefits a good deal
June 5, 2014
By Sheryl Smolkin
If you decide to start collecting CPP at age 60 but have to continue paying into the plan because you go back to work, your additional post-retirement contributions can significantly increase the amount of monthly pension you receive even while you are still working.
Since 2012, CPP recipients over age 60 who earn employment income must still contribute to the plan until age 65 and may voluntarily make contributions between ages 65-70 if they are earning an income.
Between age 60 and 70 your contributions will generate additional CPP benefits called post-retirement benefits. You don’t need to apply for these additional benefits. They will automatically be added to your monthly cheque following each year after age 60 you contribute.
A sample calculation prepared by Government Benefits Consultant Doug Runchey who worked for 32 years with Human Resources and Skills Development Canada illustrates how post-retirement contributions can add up.
His example is based on a person who in 2014 at age 60 starts collecting a maximum CPP pension of $702 ($1,038 minus the early retirement reduction of 32.4 per cent).
However in January 2015, this individual decides to go back to work. He subsequently earns the maximum pensionable amount of $52,500 (2014 figures) for the next five years before he stops working completely. Using the 2014 maximum CPP contribution level, between ages 60 and 65 he will be required to contribute $2,425.50 each year to the plan (a total of $12,127.50).
Beginning in 2015 at age 61, his pension will be increased each year by an annual, cumulative post-retirement benefit that adds up to $1,350 by age 65.
As a result, his pension of $702 per month at age 60 will increase in yearly increments to $814 monthly at age 65. Therefore, he will receive approximately $2,490 in CPP post-retirement benefits between age 60 and 65. If he lives for another 20 years until age 85, the post-retirement benefit will put an additional $27,000 in his pocket.
“By accruing additional CPP post-retirement benefits of $1,350 per year between age 60 and 65, the person in this example will earn an 11.13 per cent return on the $12,127 in contributions he made for the period,” Runchey says.
He also says that the notional return on post-retirement CPP contributions by a taxpayer earning the CPP maximum pensionable amount each year who chooses to work and contribute to CPP until age 70 will be even higher.
However, Runchey notes that if this taxpayer was self-employed and required to pay both the annual employer and employee contributions ($4,850) from age 60 to 65, the total return on his five years of post-retirement contributions will be cut in half, to 5.56 per cent.
Post-retirement benefits earned in one year are added to benefits beginning in January of the following year, but eligible contributors may not receive the payment until April or May with a retroactive payment to the beginning of the year.
The amount of CPP post-retirement benefits that you can earn between ages 60 and 70 depends on your earnings and the number of years you continue to work and contribute. A Service Canada PRB Calculator will help you calculate how contributing after you begin receiving CPP benefits but before you stop working will increase your CPP benefits at retirement.
If you are over 65 and want to stop contributing to the CPP, you must complete the CPT30 form and give a copy to your employer. If you are self-employed, you must complete the appropriate section of the CRA CPP contributions on Self-Employment and Other Earnings and file it with your income tax return.
You can change your mind and begin contributing to the CPP again but you are allowed only one change per calendar year.
Also read:
Working and aged 60 or older
Canada Pension Plan Post-Retirement Benefit – Born in 1950
CPP Post Retirement Benefits – DR Pensions Consulting
It was nice to see you include the self employed as a foot note in your explanation. I would however like to fill it out a bit. The new $814/month less the original $702/month = $112/month x 12 months x 20 years = $26,880 (you will now be 85 years old. The cost would be according to your calculation using max contribution level of $2,425.50/year x 4 years = $9,702.00 out of “the individuals pocket” and $9,702.00 out of “the individuals Company bank account” for a total of $19,404.00 in todays dollars. The net increase of $26,880.00 minus the real cost of $19,404.00 = $7,476.00 in real increase over 20 years or $31.15/month not including inflation or the fact that each year the cost of contributing to CPP increases. The real annual return SUCKS for the self employed.
What would give a boost to the major discrepancy between the self employed (i.e. small business in the true sense of the word – a one or two person operation) and the typical employee would be to introduce drop out years for “raising a business” like there is for “raising a child”. Businesses do go through a growing stage and looking at our situation the typical 7 years minimum would equate to the 7 plus years where all money went back into the business to keep it afloat and hence no salary, no CPP contributions/no CPP benefits. Those ZERO years in the calculation really do have a kick even when you have been working 45 plus years and contributing to the economy in a far greater manner than you would have being someone’s employee.
Janice
survivor of 35 years self employment and many more years to go
Janice,
Thanks for your comments. FYI, although contribution cost will go up each of the 5 years, the PRB amounts are fully indexed to increases in the CPI.
The child-rearing dropout doesn’t apply to the PRB calculation. Also, the general 17% dropout already allows everyone at age 65 to drop out their lowest 8 years.
Doug Runchey
DR Pension Consulting