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How do I determine when I reach the Canada Pension Plan’s maximum pension contribution? I’m confused about the “general drop-out provision.” On the CPP website, it says eight years. Does that mean it would reduce 47 years of contributions to 39 years? But there’s also something “in addition to the general drop-out provision.” Does this mean I can reduce it to 39? And does it count if I work beyond the age of 65?
We asked Jennifer Watson, CFP, managing partner of Watson Investments and portfolio manager of Watson Securities of Aligned Capital Partners Inc., to answer this one.
To receive the maximum CPP retirement pension, an individual generally needs to contribute the maximum allowable amount – based on the Yearly Maximum Pensionable Earnings, or YMPE – for 39 years, said Ms. Watson. “While that statement is broadly accurate, several important nuances and exceptions can affect the outcome.”
“YMPE refers to the maximum annual income level that could max out CPP contributions,” Ms. Watson said. “It is set by the federal government and adjusted each year to reflect wage growth. Employees and employers both contribute to CPP, while self-employed individuals are responsible for paying both portions. Some business owners might choose to pay themselves dividends instead of salaries, in which case, they do not contribute to CPP.”
Ms. Watson said that the CPP calculation typically looks at employment years between ages 18 to 65, which is 47 years. But there are circumstances to consider: If you were on disability during this time, those years would be removed from the calculation. If you were earning less or no money while raising young children, you can apply to remove any years when your child or youngest child was under seven, as per the child-rearing drop-out provision.
If you continue contributing to your CPP for 10 years or more, after subtracting any disability and/or child-rearing drop-out years, you will then be able to eliminate 17 per cent of the worst contribution years from the calculation, to your benefit.
“The drop-out provision is referring to the 17 per cent, excluding your worst-earning years, to benefit the pensioner,” said Ms. Watson. “If you had the full 47 years of contributions, then this is where you drop to 39 years.” She explained that the ”other provision” is in reference to the disability and child-rearing drop-out years.
“CPP retirement benefits are also shaped by when you choose to begin collecting them, and should involve careful consideration of income needs and expected longevity,” said Ms. Watson.
Taking CPP between ages 60 and 64 results in a permanent reduction in monthly payments. Starting payments at 65 would mean there is no age-based adjustment. Delaying payments beyond 65 increases the benefit each month, up to age 70. Those who continue working after 65 and have not yet started CPP may benefit further.
Higher earnings during these years can replace earlier low-income years (all relative to YMPE), increasing your eventual pension. CPP contributions stop at age 70, regardless of employment status.
Ms. Watson also recommends signing into your My Service Canada Account to review your personal CPP contributions history, check for accuracy and request an estimate of your monthly retirement benefit. The Globe also has dedicated tools and calculators to help you navigate your retirement numbers.
Do you want advice on a financial planning or retirement issue that’s affecting you? Send us an e-mail.