Canadians can increase contributions towards the Canada Pension Plan (CPP) as of January 1, 2019. This change is also known as CPP enhancement and is designed to help increase retirement income.
The CPP is Canada’s mandatory pension plan. It is financed by contributions from employees, employers, and self-employed individuals. The CPP covers all workers with the exception of employees in Quebec, as the province administers its own plan called the QPP (Quebec Pension Plan).
The CPP aims to replace a basic level of earnings for Canadians. On maturity, this enhancement will increase the maximum CPP retirement pension by approximately 50% for those who make enhanced contributions for 40 years. The CPP enhancement should reduce the number of Canadian families at risk of not having enough retirement savings especially for those without a workplace pension plan.
Canadians will reap more benefits, as they increase contributions to the CPP. Starting in 2019, the annual contribution rates will rise at a modest rate over the next seven years. For example, if you earn $54,900 per year, the contributions will increase by $6 per month in 2019. In 2023, your contributions will increase by $40 per month.
In 2020, the CPP contribution rate will increase from 5.1% to 5.25%. After including an employer contribution, this rate will increase to 10.5% of pensionable earnings. Self-employed individuals will pay the entire 10.5% amount. The CPP contribution rates will increase to a combined 11.9% by 2023 or 5.95% equal sharing by employer and employee.
The full enhancement will occur in 2065, which means people just entering the workforce will benefit the most. However, the benefits will inch marginally higher beginning this year.
Offset higher CPP contribution by investing in dividend stocks
Several Canadians inching closer to retirement are frowning over the CPP enhancement as it is a little too late for them. Soon-to-be retirees or income earners can offset the higher CPP contributions by investing in quality dividend stocks such as Bank of Nova Scotia (TSX:BNS)(NYSE:BNS).
The banking giant pays a dividend yield of 6.4%. Further, BNS stock is trading at 27% below its 52-week high. The recent pullback provides long-term investors an opportunity to invest in a blue-chip stock at a low valuation and benefit from capital gains too, as the market eventually rebounds.
BNS is the third-largest Canadian bank and can be considered among the best investments on the TSX. If you invest $50,000 in BNS stock, you can generate $3,200 in annual dividend income or $800 in quarterly dividends.
Investors are worried about the sluggish Canadian economy and rising unemployment rates that might increase the default rates for BNS and peers. However, 50% of the company’s portfolio is insured, and BNS also has a sizeable loan-loss provision.
BNS stock is trading at a forward price-to-earnings multiple of 10.5, while its price-to-sales ratio is 2.2, and the price-to-book ratio is 1.06. The stock’s low multiples make it an attractive bet for value and contrarian investors, too.
Analysts tracking BNS stock have a 12-month average price target of $61.5 for the stock, indicating upside potential of 9.5%. If you include its dividends, the 12-month return will be close to 16%.
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The Motley Fool recommends BANK OF NOVA SCOTIA. Fool contributor Aditya Raghunath has no position in any of the stocks mentioned.