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By Matthew Ardrey, T. E. Wealth
Special to the Financial Independence Hub
The rules on how CPP works changed as of January 1, 2012 with full integration of the changes to be implemented by this coming January (2016).
As this is a part of almost every Canadian’s retirement, it is important for everyone to have a good understanding of how to maximize this government benefit.
What is the best age to take CPP?
This is a common question from many people approaching retirement. How will these changes affect when you should take the pension to maximize the benefits payable to you?
First, a brief look at the changes implemented. Previously, if you chose to take your CPP early or defer past age 65 the reduction or increase in your pension was 6% per year, or 0.5% per month, to a maximum of 30%. Upon full implementation, the reduction for taking CPP early will be 7.2% per year, or 0.6% per month, to a maximum of 36%. The increase in pension from deferring, which is already fully implemented, is 8.4% per year, or 0.7% per month, to a maximum of 42%.
From a purely mathematical perspective, the following are the breakeven points for taking CPP under the new rules. We will touch on how your personal retirement circumstances may effect this decision in a later blog.
If the effects of inflation are ignored, by the time the pensioner reaches age 73, the total CPP received is greater by taking it at 65 instead of 60. Similarly, by deferring CPP to age 70, the total CPP received is greater when the pensioner reaches age 81 than if taken at 65. If inflation of 2% is factored into the calculation then the breakeven ages drop to just before 72 and just after 79 respectively.
What happens if I keep working after taking CPP?
If you are under the age of 65, CPP contributions are now 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 and 70, these contributions are optional.
To note the PRB does not affect payments to CPP disability or survivor pensions. These contributions are also not eligible for pension sharing or splitting. For more information about the PRB or to see an estimate of what your PRB is go to http://www.servicecanada.gc.ca/eng/services/pensions/cpp/prb/index.shtml.
What other things can I do to increase my CPP?
Along with the other changes made to the CPP, the general dropout provision was increased from seven years to eight years starting in 2014. This allows you to drop the eight lowest or zero earning years from your CPP calculation, causing the overall pension payment to increase.
The child-rearing provision can increase your CPP by allowing the primary caregiver to drop up to seven years of lower earnings following the birth of a child. If multiple children were born, any years that overlap are only counted once. You must make application for this provision.
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.
Matthew Ardrey is a Certified Financial Planner with T. E. Wealth. He can be reached at its Toronto offices here. He is also on Twitter as @MattArdreyCFP.
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