How Does Canada Pension Plan Work?

The safety, security and future of retirees are built on Canada’s government-backed pension plan. Without it, retirees would have to continue to work late into their twilight years instead of enjoying the time with their family and friends.

Therefore, understanding the finer details of the CPP (Canada Pension Plan) is vital for workers of all ages, from those just starting to work to those heading towards retirement. This guide will give you a breakdown of what the CPP is and how it works.


The Basics of the Canada Pension Plan

What is the Canada Pension Plan?

Established in 1965, the CPP was designed for workers to put away money for their retirement, providing them with a security blanket. It is considered one of the major retirement income pillars for Canadians. The plan offers seniors and their dependents (such as children and spouses) with a partial replacement of earnings in case of retirement, disability, or, heaven forbid, death.

Who is Eligible for It?

Every Canadian worker (outside of Quebec as they have their own pension system) who earns a basic income must contribute to the CPP. Everyone is entitled to it, including permanent residents, temporary workers and students. As long as you have a SIN (social insurance number), you can apply for it.

Like the U.S. social security system, you are required to make mandatory pay-as-you-go contributions to your funds, even if you are self-employed. You can make contributions until the age of 65; then, it is voluntary until 70.


You will be able to access the funds of your pension plan when you turn 65 years old or if you are disabled and require it earlier. Upon your death, your dependents might receive access to the funds.

How the CPP Works

In basic terms, all CPP contributions are made through payroll deductions from your paycheque or if you are self-employed through direct payments through the CRA (Canada Revenue Agency). You would have noticed a small contribution that is taken for your CPP every time you receive payment.

If you are 18 years or older, and earn more than $3,500 per year, contributions are made by both you and your employer. The amount of the contribution is based on a percentage of your income.

It is pretty much an automated system, making it easy for you to contribute to your retirement without any added effort.

Is There a Limit?

Yes, you can only place a certain amount of CPP contributions per financial year. Currently, 5.45% of your income is contributed to the funds. Your employer must also contribute a matching amount each year.

As a result, the 2021 maximum employee and employer annual contribution to your CPP fund is $3,166.00. If you are self-employed, you must pay both employer and employer contributions to your CPP.

How Much Will I Get When I Retire?

How much you can expect to receive from your CPP payments depends on several factors, including how much you contributed and for how long.

However, in most cases, you can expect to receive about one-third of your average working income up to the maximum annual pensionable earnings, adjusted for inflation.

According to PWL Capital, in 2019 that “the maximum payment was $1,154.58 per month. However, the average payment is more like 60% of the maximum, or $723.89 per month.


Why the CPP is Important for Seniors

You’ve spent your whole life working hard so you can enjoy your retirement. The CPP will help you achieve just that.

By getting a consistent income, you can slowly reduce your workload, spend more time with family and friends while still supporting your lifestyle, whether you’re living at home or in a retirement home (https://www.themanorvillage.com/).

Make your CPP contributions work for you! Speak to an advisor today for more information, so you can enjoy your retirement – not work through it!


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