Deferring Receipt of CPP: Is it the Right Call for Retirees?

When it comes to the Canada Pension Plan (CPP)/Quebec Pension Plan (QPP), most Canadians want to know whether they should take it early, at age 60 or defer it. In fact, this is a great trigger question and a core part of the discussion and a core part of the discussion about a pre-retiree's financial strategy. Yet it is surprising how few advisors drill down on this complex, and often uncomfortable decision.

And, that is the crux of the matter. Advisors and clients are forced to have the chat about life expectancy, and that can be delicate. Knowledge Bureau’s CPP Income Calculator has found that the achieving optimal value in the CPP takes planning and one of the numbers required is your client’s best guess on how long he or she will live.  The other is whether the CPP is the right option for continued funding.

We have seen many different types of retirement plans evolve to address longer life expectancy and offer flexibility to retirees; for example, the introduction of deferred benefit options for those who choose to remain in the workforce. The CPP, by contrast, has two major flaws: first, very few people max fund the plan for 40 years. But more importantly, the survivor’s benefits are not always beneficial under the CPP.   That’s because they will only top up the survivor’s retirement benefit to his or her maximum monthly amount.  If your spouse already receives the maximum, he or she will receive no more from your contributions, other than a one time, $2500 lump sum death benefit, which is taxable.  That makes funding a TFSA a better investment, in many cases.

But, on the good news side, deferring CPP/QPP does allow retirees to receive a higher benefit in later years, important when many fear outliving their savings and becoming a burden to their loved ones or communities. CPP/QPP offers the security of a structured plan, providing necessary peace of mind when many have experienced market volatility in their private plans. This is particularly important when there is a projected shortfall in retirement income due to the lack of a private pension plan, lackluster investment returns in private plans, or high investment counsel/ management fees that erode retirement savings and cash flow.

This helps with the uncertainty retirees face because they are living longer, the cost of living continues to rise and our health care system is stressed.  Long-term care is also becoming more complicated and costly in later years. Recent CPP/QPP enhancements are designed to address the perceived or real shortfall that causes retirees to hold onto assets longer, impairing their lifestyle choices, and at least for some, will provide more flexibility, and control over when to begin taking their CPP/QPP benefits.

At the core level, professional financial advice tailored and customized to an individual’s specific circumstances is essential for the most tax efficient retirement planning. It is a personal-driven process not a government-driven process. For some, the CPP is a valuable enhancement to retirement income. For others it isn’t.  

True flexibility comes when there is choice with contribution amounts as well as the timing for receipt of benefits. The most recent CPP/QPP enhancements are designed to address those most in need and, unfortunately, they may impact others negatively from a contribution and taxation perspective. To defer benefits to obtain a higher amount and then lose it out the back door to tax, when other sources of income are taken into account, is counterproductive to the preservation of wealth. It’s the advisor’s job to get to the bottom of the conundrum by compelling clients to come in before year end to have a frank and productive discussion that furthers a family’s Real Wealth Management options. 

Stefanie Keller is the CEO of Stellar Wealth & Tax Solutions, an independent financial planning practice offering comprehensive financial and business planning and cross-border advisory services to individuals, professionals, entrepreneurs and snowbirds.

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