Before you can decide what\’s the best choice for you (and your spouse or partner, if you have one), you need to assess what the CPP changes really mean in terms of the CPP benefit you can receive. Keep in mind that changes are being phased in – all changes will be fully effective by 2016 at the latest.
What to consider when deciding when to start receiving CPP*
T.E. Wealth Strategies first reported on the then-proposed changes to the Canada Pension Plan in the Winter 2010 issue. Now that those changes have been given royal ascent, people are wondering what they should do. Should you take CPP early, even though the discount for early payment has increased? Or would you be better off to continue to work and contribute to the plan to receive an enhanced payment at age 65 or later?
The rules of the game have changed
A new discounting rate
If (before 2012) you elect to take CPP benefits early, your payment will be discounted 0.5% for each month you receive the benefit prior to age 65. For simplicity\’s sake, let\’s assume your annual CPP benefit at age 65 is $10,000. If you commence receiving CPP at age 60 before 2012, the discount would be 30% (12 months x 0.5% x 5 years) or $3,000. However, if you elect to take CPP benefits early after 2012, the discount factor will be phased in to eventually equal 0.6% per month by 2016. To continue with the example, after 2016 the discount for taking CPP benefits at age 60 will be 36% (12 months x 0.6% x 5 years) or $3,600.
Enhancements if you defer
Currently, if you defer receiving CPP benefits to after age 65, your benefit is enhanced by 0.5% per month for each month of deferral up to age 70. Beginning in 2011 and fully phased-in by 2013, CPP benefits will be enhanced by 0.7% for each month of deferral after age 65. Following the previous example, deferring benefits to age 70 would result in a 42% (12 x 0.7% x 5 years) enhancement or $4,200.
Opportunity for additional contributions and enhanced benefits
The revised rules eliminate the work cessation test by 2012. This test restricted your ability to collect CPP benefits if you were still working, depending on how much you worked. Under the new rules, you can work as much as you want and collect CPP benefits at the same time. However, you will be required to contribute to the CPP and these contributions are mandatory up to age 65, and optional to age 70. Contributions create a new \”Post-Retirement Benefit\”, which is added to your CPP benefit when you fully retire or at age 70, whichever is earlier. This benefit is based on how much you earn in the year and an actuarial adjustment based on your age at that time. The maximum Post-Retirement Benefit in any year is 1/40th of the maximum pension for the year multiplied by the actuarial adjustment factor.
Factor in mortality
The inducement for deferring your CPP benefits to age 70 is hard to ignore. By waiting from age 60 to 70, you more than double the annual CPP benefit you can receive. It\’s a wise investment, assuming you live long enough to see it pay off. And given the new discounts and enhancements, you don\’t have to live all that long. If you begin receiving the CPP benefit at age 60, you will receive $64,000 in payments by the time you turn 70. However, when you reach age 79, the total CPP received by deferring benefits to age 70 ($127,800) is more than the total received under a discounted benefit beginning at age 60 ($121,600), with the gap widening in every subsequent year. The results are similar if you wait to age 65 to begin collecting benefits. It just takes nine years before waiting to age 65 would pay off.
So when is the best time to take the CPP? It can be as simple as answering the question, \”How long do you think you will live?\” and then determining how much you are willing to bet on your answer.
Run the numbers to be sure
The decision of when to take the CPP becomes further clouded if you are planning to continue working in retirement. Your CPP benefits will be increased by the Post-Retirement Benefit based on how long you work and how much you earn and contribute to the CPP during that period.
With so many variables, you\’ll need to work out the numbers specific to your situation with your advisor. However, don\’t count on the Post-Retirement Benefit to make up for the discount for taking CPP benefits early. According to a presentation from the Federal Government titled Modernizing the Canada Pension Plan, \”The new post-retirement benefit provides modest compensation for this reduction.\” In addition, the Post-Retirement Benefit does not apply to survivor and disability benefits.
How the CPP benefits add up
Here are the CPP benefits after all discounts and enhancements are fully implemented, assuming an annual CPP benefit of $10,000 at the normal retirement age of 65. CPP benefits commence at ages 60, 65 and 70:
- One year $6,400 (age 61) $10,000 (age 66) $14,200 (age 71)
- Five years $32,000 (age 64) $50,000 (age 69) $71,000 (age 74)
- Ten years $64,000 (age 69) $100,000 (age 74) $142,000 (age79)
*Changes to the CPP have not been adopted by the Quebec Pension Plan.