CPP – Now or Later?

One of the more difficult decisions for those approaching retirement is when to start receiving their CPP retirement pension. 

In part 1 of this article, we will look at a number of factors that must be weighed to make that decision.

Starting Early

You can elect to begin receiving your CPP retirement pension as early as age 60 – but at a price.  There is a penalty of 0.6% for each month the pension starts before your 65th birthday.  Those who start at age 60 will suffer a penalty of 36% of their pension entitlement.  Thus, if your Statement of Contributions from Service Canada shows that you would be entitled to a $1,000 per month pension at age 65, your pension will only be $640 per month if you start at age 60.  If you continue to work after you receive your pension, you must still continue to contribute to CPP until age 65.  After you reach 65, you can opt out of contributing if you’re already receiving your pension.  On the bright side, those extra contributions will earn you a small additional pension called a post-retirement benefit.

Delaying

If you delay starting your pension beyond your 65th birthday, you’ll receive a larger monthly benefit.  Your pension will be increased by 0.7% for each month you delay – for up to 60 months.  If you delay until your 70th birthday, your pension will be increased by 42%.  For example, if you were entitled to a $1,000 per month pension at age 65, and you delay until age 70, your pension will be $1,420 per month.  On the down side, you’ll have to continue contributing to age 70 if you continue to work.  Those extra contributions will earn you an additional post-retirement benefit.

Longevity

Perhaps the most difficult question to answer is “How long will I live?”  The longer you live, the longer you’ll receive your pension and therefore the more you’ll get from CPP.  A general rule of thumb is that if you’ll live beyond age 74, you will benefit from delaying the start of CPP.  If you live to age 80 or beyond you’ll get more from CPP if you delay starting to age 70.  The average Canadian who makes it to age 65 will live to about age 85.

Death

When you die, the maximum death benefit from CPP is $2,500.  If you have a spouse, they will be entitled to a survivor pension of 60% of the deceased taxpayer’s pension entitlement.

Pension Limits

The maximum CPP retirement pension for 2015 is $1,065 per month (excluding any post-retirement benefit and increase for delaying).  That maximum includes both the taxpayer’s own CPP retirement pension and any survivor pension that they are entitled to.  This means that where both spouses have CPP pension entitlement, the amount of the survivor pension may be reduced or even eliminated.

Help

To help, Knowledge Bureau has created a CPP Retirement Income Calculator.  Click here to sign up for a free trial.

Next week: Part 2 of this article includes a case study of two brothers.