How to apply for CPP: What you need to know
Author: Tom Drake
The Canada Pension Plan (CPP) is a guaranteed retirement pension administered by the Government of Canada. It provides Canadians with a monthly pension for life, based on how much they contributed to the plan during their working years. To apply for the CPP, you must be at least 60 years old, and have made at least one valid CPP contribution during your working years.
How do CPP contributions work?
Each year, you and your employer contribute a percentage of your income to the Canada Pension Plan, up to a prescribed maximum, known as the Year's Maximum Pensionable Earnings (YMPE).
For 2020, the YMPE is $58,700. There are no CPP contributions on income beyond this amount, and your first $3500 of earnings is exempt from CPP contributions, which means the maximum amount you will make contributions on is actually $55,200.
The contribution rate is 5.25% for both employee and employer, for a total of 10.5%. For example, if your income was $40,000, your total CPP contributions would be $3,832.50. ($40,000 – $3,500 = $36,500 X 10.5% = $3,832.50).
How much CPP will I receive?
The amount of CPP you receive each month depends on a few factors; your age when you apply, how much you contributed to CPP and for how long, and your average annual earnings throughout your career. The average Canadian retiree receives a monthly benefit of $710.41, and the maximum monthly amount for 2020 is $1,175.83 per month.
You can continue to work and receive CPP. If you do, you will continue to contribute to the CPP, which will go towards a post-retirement benefit. CPP contributions stop once you hit age 70, even if you continue to work.
How do I apply for CPP?
Applying for your CPP is a 5-step process, for which you need to make a number of choices. Let's take a closer look at each step.
1. Determine your eligibility
Most Canadian workers qualify to receive CPP. Still, it's important to make sure you are eligible before you apply. The primary criteria is that you are at least 60 years old, and that you have made at least one valid Canada Pension Plan contribution during your career.
2. When to apply for CPP
The standard age to apply for CPP is age 65, but you can apply for a reduced benefit amount as early as age 60. In other words, the longer you wait, the higher your CPP payment will be. In fact, you can receive an increased benefit all the way to age 70. When you apply for CPP will likely depend on what other sources of retirement income you have, and whether it's enough to live on.
Some people decide to apply at age 60 for the simple reason that life is not guaranteed, so why wait to begin collecting payments. You can apply up to 12 months prior to beginning to collect Canada Pension Plan, with the government recommending that you give at least 6 months lead time.
3. Choose your application method
You can apply for CPP in-person, by mail, or online, which has the fastest turnaround time. When you apply for CPP online, your application can be processed within 7 to 14 days. Applying in-person or by mail can take as long as 4 months.
4. Submit your application
If you are applying in-person or by mail, you can fill out a CPP application form and send it in the mail, or drop it off at any Service Canada location. If a friend or family member is helping you apply, you can give them permission to contact the CRA on your behalf, by filling out a form, or by logging in to your My Service Canada Account. They will not be able to apply for the CPP on your behalf, however.
Note: It's illegal to omit or file false or misleading information on your CPP application. If this occurs, you could be fined, or receive other penalties. For this reason, make sure you double and triple check the documentation before submitting.
5. Check for status updates
You can check on the status of your CPP application using the My Service Canada Account online.
Should I apply for my CPP early?
Many people question whether they should start collecting their CPP prior to age 65, due to the payment reduction, which is .6% for each month before your 65th birthday. For example, if you were eligible for a monthly CPP of $1000 at age 65, you would only receive $640/month if you decided to draw at age 60 (.60% X 60months = 36% reduction).
The benefit of doing so is that you begin receiving benefits 5 years early. The downside is that you'll be stuck with a reduced payment for life. Depending on your situation, this could impede your quality of life as you age. Something else to consider is that you don't know how long you will live. What if you didn't collect CPP until 65, and ended up passing away at age 68. You will have forfeited thousands of dollars of hard-earned pension benefits.
Applying for CPP: Summary
The Canada Pension Plan should be considered a key component of your retirement plan. While it won't provide enough income on its own to live comfortably in retirement, it can be a much-needed enhancement alongside other retirement income sources, like an RRSP or company pension plan. If you're nearing the age at which you can apply for CPP, it's important that you take time to figure out how much you'll qualify for, and when you should apply.