In January 2012, the federal government made changes to the Canada Pension Plan (CPP) and the final stages of those changes took effect in 2016. The expanded CPP was designed to help people better plan for retirement in light of disappearing corporate pensions, but few people fully understand how their decision to take this benefit early, or defer it, could impact their financial futures. As a result, most people default to taking it sooner without crunching the numbers, or considering other personal factors in their particular retirement circumstances. Let’s take a look at what this could mean for you.
What to expect if you take your CPP early
Retirees can now take their CPP as early as age 60, or defer it until age 70. As one might expect, if you elect to take your CPP early, you will receive less. The trade-off is that you will receive your CPP sooner (and, presumably, for longer). If you elect to take your CPP before the age of 65, you will give up 0.6% of your benefit for every month preceding your 65th birthday. For example, if you take it at age 60, you will be choosing to take your CPP 60 months early (5 years x 12 months), thus, your payments will be reduced by 36% (60 months x 0.6% per month). Conversely, if you defer CPP until age 70, your benefit will be increased by 0.7% per month of deferral, meaning you could ultimately increase your CPP benefit by 42% (60 months x 0.7%).
The following chart shows an estimation of one’s CPP breakdown under the separate possibilities of taking CPP at ages 60, 65 and 70. As you can see, deferring your CPP until age 70 would ultimately result in a higher gain long term.
|Taken at age||Annual pension reduction/increase||Annual pension amount|
*Chart shows the maximum payout based on 2017 figures and indexed annually. The amount of your Canada Pension Plan (CPP) retirement pension is based on how much you have contributed, and how long you have been making contributions to the CPP at the time you become eligible.
Though taking CPP early seems to be a bad deal on the surface, many people are opting to do just that. A common explanation for this is the unpredictability of health or life expectancy. Most people (however healthy) are not prepared to gamble on the unknown. For this reason, they choose to take their CPP as soon as possible despite the fact that the general health of Canadians continues to improve and life expectancy is on the rise.
Personal retirement circumstances
Based on your personal life circumstances, other factors may come into play which are not reflected in the above figures. For instance, if you stayed at home to raise children, these estimates do not account for the CPP child-rearing provision. Nor do they account for those who are currently receiving a CPP Survivor’s pension.
If your future earnings will be significantly higher or lower than your previous average lifetime earnings, this could also affect the amount you would receive. For example, if you are 55 and no longer working and contributing to the CPP, your benefit at 60 will likely be lower than what is shown above.
What happens if I keep working after taking CPP?
If you are under the age of 65, CPP contributions are mandatory. If you are taking the CPP while you continue to work, these contributions increase your retirement pension through the Post-Retirement Benefit (PRB). This increase takes effect the year following the year the contributions were made. If you are between the ages of 65-70, these contributions are optional.
Note that the PRB does not affect payments to CPP disability or survivor pensions. These contributions are also not eligible for pension sharing or splitting.
Are there any other changes that can increase my CPP?
You are allowed to drop the eight lowest or zero-earning years from your CPP calculation causing the overall pension payment to increase. This is known as the general drop out provision.
Though not a change to the CPP, you can share your pension with your spouse or common-law partner which may result in tax savings. The portion of the pension eligible for sharing is based on the number of months you lived together while eligible to contribute. To share the CPP, both must be eligible to receive the CPP and must make application to do so. This will not change the overall payment of the pensions, but reallocate how it is paid and taxed.
As you can see, the decision of when to take your CPP demands more than a knee-jerk reaction. Becoming more informed about this benefit and working with a financial professional can go a long way in ensuring that your retirement funds last as long as you do.
If you have questions about your retirement readiness, such as when to take CPP, T.E. Wealth can show you scenarios that include your pension plan(s) and other savings, as well as the impact that different financial planning decisions can have on your retirement nest egg.
Quebec legislation differs in most cases mentioned here. If you are a resident of Quebec, please call our Montreal office for province-specific information about asset protection strategies.
These articles are for general informational purposes only. Please obtain professional advice before taking any action based on this information. No endorsement or approval of any third parties or their advice, information, products or services should be implied by any references to third parties contained in any article. Trademarks cited in these articles are the respective properties of their owners.