Everything You Need To Know About CPP
In this presentation, you'll learn:
- An Introduction to CPP
- How the contributions are calculated
- How your benefits are calculated
- How to decide the best time for starting your CPP
- The break-even points for taking it at age 60, 65, or 70
What is cohabitation?
Cohabitation means living together. Two people who are cohabiting have combined their affairs and set up their household together in one dwelling. To be considered common-law partners, they must have cohabited for at least one year. This is the standard definition used across the federal government. It means continuous cohabitation for one year, not intermittent cohabitation adding up to one year. The continuous nature of cohabitation is a universal understanding based on case law.
While cohabitation means living together continuously, from time to time, one partner may have left the home for work or business travel, family obligations, and so on. The separation must be temporary and short. Learn more at Canada.ca
Does it make sense to split CPP credits in a divorce or relationship breakdown?
A couple who have lived together, either as a legal marriage or a common-law relationship needs to understand what happens to their CPP credits if they separate.
Think about this for a moment: A loss of $100/month over a 25 year period is close to $30,000.
If this situation applies to you I would strongly encourage you to contact Doug Raunchey at drpensions.ca
What happens if you retire early and have no more CPP contributions?
Basically, if you stop working before age 60 and you are no longer contributing to CPP it will have a negative impact on your CPP after a certain age.
Example: Retire at 55 with 35 years of maximum contributions (35/83% = 42.16 + 18 = 60.16) Your CPP benefit will start to be reduced if you wait longer than age 60 to start. As you add more zeros into your formula you are going to average down the amount you will receive.
A mistake to avoid: Assuming that your CPP benefit estimate from the Service Canada site is correct. When you look at your estimate at age 55 that estimate is assuming you will continue to add contributions close to what your average has been until you are 65.
How to share your CPP pension with a spouse to reduce tax?
Married and common-law couples can share the CPP credits they earned while they were married throughout the contributory period. If a couple were together for 40 years and they are both 60 when they start their CPP it means that they can choose to share 100% of their CPP benefits in retirement as a way to potentially reduce income tax. It makes sense if one spouse is in a higher tax bracket than the other. This way the higher income earning spouse can share up to 50% of their CPP benefit and reduce their taxable income.
For example, if Bob's CPP is $500/month and Lisa's CPP is $1000/month, they could in essence have $750/month each. Let's say Lisa is in a 30.5% tax bracket and Bob is in a 25% tax bracket. By splitting their CPP, Lisa is able to save 5.5% income tax on $3000 of annual income ($165 savings each year). It's easy to do by completing a form which is located on your Service Canada account. Click here to learn more and to apply.
It's not always going to be a 50/50 split, because it is based on the years you were married. If you were only married for 20 years then the math will be different. Get ready for some brain-numbing math.
For Example, Bob's CPP at age 60 is $700/month and he has been married to Lisa for 20 years and he has 40 years of contributions. Lisa has 35 years of contributions and her CPP is $300/month. Bob can share 50% of his $700 with Lisa (20/40=50% $700X50% = $350). Lisa can share (20/35 = 57%) of her $300 with Bob ($300X57% = $171).
From here we put the sharable portions together in one pool ($350 + $171 = $521 - this is the amount they can share).
Bob will now have 1/2 of the 'sharable pot' $260.50 and $350 from his personal 'unsharable pot' for a total of $610.50.
Lisa will have $260.50 from the 'sharable pot' and $129 from her 'unsharable pot' for a total of $389.50. Bob shifted $89.50/month of income to Lisa.
The good news is you don't have to do this math as Service Canada/CRA will do it for you. Does it make sense? Yes, if one spouse has a lower CPP benefit or if the shift of the CPP income can be taxed at a lower rate.
In Conclusion
We hope you enjoyed the first lesson in this series. In a day or two, you will receive an email with the second lesson, "What You Need To Know About Post-Retirement Benefits" - these are the top-ups you get to your CPP if you are still working while you are collecting.
Get your Statement of Contributions
Click here to access the service Canada site.
We appreciate your feedback. Let us know what you like or do not like and how we can make the presentation easier to follow. Send us an email: info@langfordfinancial.ca
Need help with your planning? Not confident in your current advisor? Do you have more questions than answers? We offer unbiased flat-fee retirement income plans for those over age 55 and transitioning into retirement.
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Retirement Income & Tax Planning For Canadians 55+
Willis J Langford BA, MA, CFP
Nancy R Langford CRS
