Gordon Powers

The ideal retirement plan is really a four-legged stool made up of personal savings, home equity and private or government pension plans.

Unfortunately, two thirds of working Canadians don't have any pension plan to begin with and one third of them don't own a house.

But just about everybody over the age of 65 can expect to enjoy some form of government pension, whether it's the Canada or Quebec Pension Plan (CPP/QPP) and/or the Old Age Security (OAS).

But you have to apply first and being slow off the mark can be costly. OAS, for instance, only provides back payments for up to 12 months after your 65th birthday. For CPP pensions that start at age 65 or later, the window is 11 months. And there are no retroactive payments whatsoever for CPP pensions that start between the ages of 60 and 64.

Here's what to look for:

Canada Pension Plan
The CPP is often the first pension that people collect and the one they understand the least. It's financed through mandatory contributions from employers, employees and the self-employed — as well as investment income from the $128-billion CPP Investment Board. Employers and employees make equal contributions (self-employed workers pay both ends) based on a maximum amount of pensionable earnings ($47,200, in 2010), adjusted annually.

The amount you'll eventually receive depends on your time in the plan and your career earnings going back to Jan. 1, 1966, or when you reached age 18, whichever was later. The program is designed to replace about 25 per cent of your earnings while you paid into the plan with CPP setting a maximum monthly benefit each year.

If you're still working, you should be receiving periodic statements from CPP which outline the estimated monthly pension you'll receive once you hit 65. The maximum annual payment for 2010 is $11,210 or about $934 a month, all of which is indexed to inflation.

However, most people don't earn anywhere near that. In fact, the average monthly CPP payment in 2009 was $502 a month or $6,024 a year, all of which is taxable, of course.

You can start collecting CPP as early as age 60, but your monthly pension is reduced by 6 per cent for each year you're under age 65. Similarly, if you elect to start taking it later than age 65, the amount of your pension is adjusted upwards by the same percentage for each year past 65. Age 70 is the limit, though.

In order to start collecting CPP, you must stop working for two months, but you can start working again afterward and still receive your pension. You can still work as much as you want, but you can't pay into the plan in the hopes of increasing your current pension.

All this is about to change, however. Starting in 2012, the early-retirement discount is going to gradually increase to 7.2 per cent a year. In other words, applying for CPP on your 60th birthday will ultimately mean losing 42 per cent of the amount you would have received at 65, rather than the current 30 per cent penalty.

These new rules will be phased in over a five-year period from 2012 to 2016. This means that in 2012 the initial penalty for taking CPP early will actually be 6.24 per cent annually.

You'll also now be required to continue making contributions to the plan if you keep working, although the amount of your pension will be increased to reflect these additional contributions.