CPP rules can be complicated and there a number of provisions that can affect your pension benefit when the time comes. The provisions that may have the most impact, however, is the CPP dropout provision and the Child Rearing Rule. It is important to have a good understanding of how these provisions can impact your pension entitlement when planning for retirement.
What You Need to Know
The CPP Dropout Provision is designed to acknowledge years of low or no earnings from the beginning of the contributory period starting at age 18 until 65. Currently, the general dropout rate is 17% of lifetime earnings. This means, if you retire at 65, that you will lose 8 of your worst earning years. All past earnings are updated to reflect current values and compared against the current Yearly Maximum Pensionable Earnings. This means that earnings that were normal in the past but would be considered low now due to inflation are indexed to reflect their worth in today’s dollars.
It is also important to understand how the provision changes if you retire before age 65. If you take your pension before age 65 the dropout rate is reduced accordingly to account for a shorter contribution period. However, if you retire early but do not start drawing on your pension until age 65 then the years that you are not working before starting CPP are treated as contribution years still and would be subject to being used in the dropout calculation.
The Child Rearing rule is also key to calculating that proper CPP benefit. The Child Rearing Benefit was introduced to acknowledge years of no or low earnings that occurred because you were raising a child under the age of 7. Unlike the dropout provision, you must apply for the Child Rearing benefit. The following requirements need to be met to claim the benefit:
- You must have not worked or had low earnings while being the primary caregiver of a child under the age of seven born after December 1958
- You must have been eligible to receive the family allowance or child tax benefit
- You must be able to provide proof of age for each child
Either parent may claim the child rearing provision.
The Bottom Line
The drop out rule and the child rearing provisions can have a significant impact on your CPP entitlement. It is important that your advisor include these in your retirement projections to ensure that you are planning accurately. You can request a Statement of Contributions from Service Canada that will show what your expected CPP benefit will be. This will give you a good idea of what to expect when the time comes to retire.
