In a prior blog, I talked about some recent changes to QPP that improve the amounts you can expect for deferring your pension to age 70 and even 72. There is another way to improve your government guaranteed retirement cash-flow and it can have a material impact on the benefits you get!
Many already know that the QPP (and CPP) benefits calculation drops out the 15% (or 17% for CPP) of years in which you had the lowest income, between ages 18 and 65, but did you know that there is also a provision for parents who were raising young children? This is to recognize the sacrifice of time and earnings it can take to raise children by increasing your QPP or CPP pension benefits. Let’s get into it!
Any year in which you were eligible to receive child-related government benefits and had a child under the age of seven qualifies as a potential year for drop-out. These years may be either fully dropped or partially dropped from the QPP/CPP calculation, as detailed below.
A qualifying year that is fully dropped from the calculation is one where pensionable income for the year was below the minimum amount of $3,500 for QPP. It is important to note that QPIP or EI income, dividends from a corporation, or taxable capital gains (to name a few) are not considered income for the purpose of the child rearing drop-out. These years are the first to be dropped in the QPP calculation process.
The trickier step of the process is determining which child rearing years can be dropped where pensionable income was above the $3,500 QPP threshold. After the years with pensionable income less than $3,500 have been eliminated, an average monthly income for the entire working career of the pensioner is determined. Then, each month of income for the eligible parent is compared to the average monthly income. If the income is below the average, it is removed for the purpose of determining the pension amount, otherwise, it is included.
This skips over a great deal of nuance and how any periods of disability would interact, but the point is that the methodology is built such that it can only increase the pension amount one would receive. Importantly, it is only after the parental drop-outs have been applied that the lowest income months are considered – up to 15% (17% for CPP) of the remaining months of contribution.
The main condition for drop-out is having qualified for parental government benefits, such as the Canada Child Benefit (CCB) and/or the Family Allowance, for a child under the age of seven. In the case of a child with a disability, the parental drop-out period extends to all years where the child was under the age of 18.
It is important to note that only one of the parents is entitled to either of these benefits, meaning only the parent receiving the CCB or Family Allowance will benefit from the child rearing drop-outs. Furthermore, it need not be the birthing mother who receives the government benefits, as in such cases as same-sex couples, adoptions, children through surrogacy, to name a few.
Finally, if your family income was too high to receive any of the mentioned benefits, such as the income-tested Canada Child Benefit, you would still qualify for the parental drop-outs as long as you were eligible to apply for the benefit.
With the 2024 QPP changes coming into effect, the child rearing drop-out provisions greatly benefit any parent considering deferring their pension past age 65. Since the working age can now be capped at 65, all years past that point are automatically excluded from the pension calculation. This means a higher average income and a greater chance that relatively low-income years get dropped when applying for the child-rearing drop-out.
The good news is that despite the trickiness of calculating a QPP benefit, this is all done behind the scenes at Retraite Quebec, including the child rearing provisions. When looking over your statements of participation, however, it is important to note that the child rearing provisions are not included, meaning your pension estimate is likely below what you will receive. This effect could be quite large, especially if you had several years of no income while raising children.
As always, we recommend seeking professional advice to make sure you get the most out of your government pension!
