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  • Writer's pictureThomas Poff, CFA

Understanding the Difference Between Canada Pension Plan (CPP) and Old Age Security Enhancements (OAS)

Whether you’re in your 30s or early 60s with retirement just around the corner, it’s important that you understand what your income will be. After all, it’s better to be prepared financially than be surprised by the kind of government help you’ll get when you turn 65. This can better help you set achievable goals for retirement.

There are several ways you can earn retirement income in Canada: the Canada Pension Plan (CPP), Old Age Security (OAS), workplace pension plan, tax-free savings account (TFSA), retirement savings and investments, and earnings if you continue to work in retirement.

Two primary pillars of Canada’s federal public retirement pensions are the CPP and OAS.

While neither is designed to help cover all your financial needs in retirement, they are backed by the federal government and are financially secure. This means you can count on them regardless of when you decide to start collecting them.

Continue reading to learn about each program, how they are different, and any enhancements or changes that are coming in 2024.

What Is the CPP?

The Canada Pension Plan, or CPP, is a public pension plan that all working Canadians contribute to. Everyone over the age of 18 has contributed to it whether they know it or not. If you’re employed, contributions are automatically deducted by your employer. If you’re self-employed, you need to make regular contributions. The CPP is mandatory, so you can’t opt out.

When you retire, the amount you contributed to the CPP determines what your monthly pension payment will be. The more you contribute to the CPP, the higher your pension will be. For 2024, the average monthly CPP benefit starting at age 65 is $758.32, or $9,099.84 annually.

CPP payments are considered taxable income and need to be included in your annual tax filings.

What Are the 2024 Changes to CPP?

In November 2023, the Canada Revenue Agency announced new contribution rates and amounts for 2024. The CPP earnings rate and contribution limits go up annually, starting January 1, 2024. This year, some higher-income earners will end up contributing more but will also get more back.

Enhancements to the CPP actually began in 2019 and when fully implemented, could increase the maximum CPP retirement pension by up to 50% for younger workers just getting into the workforce. Phase two of the enhancements began in January 2024.

Since 2019, the CPP contribution rate has increased every year from 4.95% in 2018 to 5.95% in 2023. This works out to a 1% increase for both employees and employers. For those that are self-employed, you pay for both the employee and employers, for a 2023 contribution rate of 11.9%.

The employee and employer contribution rate remains at 5.95% in 2024, but the maximum pensionable earnings increases to $68,500 with a basic exemption amount staying at $3,500.

What Is OAS?

Old Age Security is a monthly pension given to all Canadians when they turn 65. It doesn’t matter if you were employed throughout your life or not, the only requirement is that you are a Canadian citizen or permanent resident and have lived in Canada for at least 40 years after the age of 18.

In most cases, you’re automatically enrolled when you turn 65. If you have only lived in Canada for 20 years, you’re eligible for partial payouts. If you’re a new immigrant to Canada and have lived here for less than 10 years, you are not eligible at all.

Nothing is free of course, OAS payments are taxable income, which means the amount must be reported on your income tax returns.

What Are the 2024 Changes to OAS?

Canada’s OAS monthly pension rates were revised higher in the first quarter of 2024. As a result, for Canadians aged 65 to 74 years, the maximum monthly payment amount increases to $713.34. For those 75 years of age and older, the maximum monthly amount is up to $784.67.

When you turn 75 the amount is raised by 10%. Each quarter the payouts are indexed to inflation. Payments do not go down if the cost of living goes does.

Sharp Asset Management – Helping You Reach Your Financial Goals

Canadians have numerous sources of retirement income, but the two biggest federal pension plans are the CPP and OAS. If you live in Toronto or the GTA and are looking for a retirement planner to help you maximize your income and minimize the tax you pay, speak with a private wealth management professional at Sharp Asset Management.

Sharp Asset Management is an independent wealth management firm that is 100% owner-

operated. All of our investment counsellors are charter financial analysts, have the highest level of achievement, and have over 10 years of experience managing portfolios. To learn more about how Sharp Asset Management can help you with your retirement planning, contact us today.

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