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Understanding the Canada Pension Plan and how it fits into your retirement

The Canada Pension Plan is becoming a political football as the Federal election draws near, but it’s your future that could be getting punted forward.

The Federal Conservative government has vowed to look into expanding the national pension plan to allow workers to voluntarily increase payments. It follows a proposal from the Ontario Liberals to make a provincial expansion of the government pension system mandatory if workers don’t have access to a company pension plan - and force employers to keep matching employee contributions.

Either way, Canadian workers outside of Quebec would be given another option to save for retirement, and this could be one of those election issues that hits home for a generation that falls short when it comes to saving.

The ABCs on CPP

The first step to being informed is to understand how CPP works. Employees contribute based on how much they earn, normally through regular paycheque deductions. Their employers match their contributions.

To obtain the maximum payout in retirement, employees must make the maximum contribution for at least 40 years of their working lives. The maximum payout is currently about $1,100 a month. The payout is adjusted to inflation, making it easy to grasp how much $1,100 will be in the future.

Canadians who pay into CPP normally begin claiming it when they turn 65 years old. However, they can start collecting a reduced amount at 60, or an increased amount after 65.

CPP also provides disability pension and survivor benefits if the plan member dies early.

You can find out where you stand in the plan by registering on the CPP website.

CPP as part of a retirement plan

The Canada Pension Plan is intended to compliment an individual retirement plan, which may include a company pension plan, or a personal registered retirement savings plan (RRSP) or tax free savings account (TFSA).

It’s important to know that part of the Canada Pension Plan is invested in global securities, which carry risk. The CPP investment board has been hitting double-digit return home runs lately, but there’s nothing to say they won’t strike out every now and then.

A quick factsheet on the Canada Pension Plan

  • Almost all individuals who work in Canada contribute to the Canada Pension Plan (CPP). The CPP provides pensions and benefits when contributors retire, become disabled, or die.
  • Retirement pension: You can apply for and receive a full CPP retirement pension at age 65 or receive it as early as age 60 with a reduction, or as late as age 70 with an increase.
  • Post-retirement benefit: If you continue to work while receiving your CPP retirement pension, your CPP contributions will go toward post-retirement benefits, which will increase your retirement income.
  • Disability benefits: If you become severely disabled to the extent that you cannot work at any job on a regular basis, you and your children may receive a monthly benefit.
  • Survivor benefits: When you die, CPP survivor benefits may be paid to your estate, surviving spouse or common-law partner and children.
  • Pension sharing: Married or common-law couples in an ongoing relationship may voluntarily share their CPP retirement pensions.
  • Credit splitting for divorced or separated couples: The CPP contributions you and your spouse or common-law partner made during the time you lived together can be equally divided after a divorce or separation.

Source: Service Canada

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