Deciding when to start collecting your Canada Pension Plan (CPP) benefits is a decision that can significantly influence your financial security during retirement. The CPP provides retirement income to Canadians who have contributed during their working years. You can start receiving benefits as early as age 60, defer until age 70, or choose any time in between. Each option has its own advantages and considerations.
Here we will explore the implications of starting CPP at different ages, the rules around years of contribution and how they affect payments, outline how you can split CPP with a spouse, and what happens if you continue working while collecting CPP.
Understanding CPP Basics, Qualifying Years of Employment, and CPP Values
Before diving into the timing options, it’s important to understand how CPP works. The amount of your Canada Pension Plan (CPP) benefits is based on the number of years you have contributed to the plan and the level of your earnings during those years. To qualify for CPP, you must have made at least one valid contribution to the plan. The benefits are calculated based on your average earnings over your contributory period, which starts from age 18 until you start receiving CPP, or until age 70 if you continue working.
Key factors include:
• Maximum Pensionable Earnings: Your contributions are based on earnings up to a yearly maximum limit, known as the Year's Maximum Pensionable Earnings (YMPE). Contributions made on earnings above this limit do not count towards your CPP benefits.
• Dropout Provision: The CPP has a dropout provision that allows you to exclude up to 17% of your lowest earning years from the calculation. This helps individuals who have had periods of low or no earnings due to unemployment, education, or caregiving responsibilities.
• Enhanced CPP: Since 2019, CPP benefits are gradually being enhanced. Contributions are increasing, and the benefits will eventually replace a larger portion of your earnings. The enhancements apply to contributions made after 2019.
The more years you contribute and the higher your earnings (up to the YMPE), the higher your CPP benefits will be. Additionally, the longer you wait, the more you receive.
Collecting CPP at Age 60
Starting CPP at age 60 allows for early access to your pension but comes with reduced monthly payments. Some of the advantages are:
- Early Access to Funds: If you need income before age 65, starting CPP at 60 provides an immediate cash flow, which can be essential if you retire early or need funds for other reasons.
- Flexibility in Retirement Planning: Early CPP payments can offer financial flexibility, allowing you to reduce work hours or pursue part-time employment.
If receiving your CPP early, you should be aware of these considerations:
- Reduced Benefits: For each month you take CPP before age 65, your benefits decrease by 0.6%, resulting in a 36% reduction if you start at 60.
- Impact on Long-Term Income: While early payments provide immediate income, the reduced benefits can impact your long-term retirement income, especially if you live longer than expected.
Collecting CPP at Age 65
The standard age to begin receiving CPP is 65. At this age, you receive your full CPP benefits based on your contributions during your working years. Advantages of this include:
- Full Benefits: Starting CPP at 65 provides the full calculated benefit amount, offering a balanced approach between early and deferred options.
- Steady Income: Full benefits at 65 provide a steady and predictable source of retirement income, helping to cover essential living expenses.
Factors to consider if deciding to receive CPP at age 65:
- Average Life Expectancy: If your life expectancy is average or below average, starting at 65 ensures you receive a fair amount of your CPP contributions during retirement.
- Health and Employment Status: If you plan to continue working or have other sources of income, starting CPP at 65 might fit better into your overall retirement strategy.
Collecting CPP at Age 70
Deferring your CPP benefits until age 70 results in significantly higher monthly payments. These are the advantages you should know about:
- Increased Benefits: For each month you defer CPP after age 65, your benefits increase by 0.7%, resulting in a 42% increase if you start at 70.
- Enhanced Financial Security: Higher monthly payments provide greater financial security in later years, which can be beneficial if you have a longer life expectancy.
- Tax Planning: Delaying CPP can help manage taxable income if you expect to have lower taxable income after age 70, potentially reducing your overall tax burden.
Important considerations if deferring your CPP:
- Delayed Access: You forgo several years of payments, which might be necessary if you need income earlier to cover living expenses.
- Health Considerations: Deferring might not be beneficial if you have health concerns.
While deciding when to start collecting your CPP may seem like an easy decision, it’s not as easy as it may seem. You need to consider your personal situation such as health and life expectancy. You also want to consider other retirement funding, like Old Age Security (OAS), any self-funded Retirement Saving Plans, and if you have a company pension - as these will all impact your personal tax rate. A tailored financial plan can take all of these factors into consideration and compare different scenarios to pick the best option that suits your needs and provides the optimal benefit.
~Amber Li, The CM Group
CPP Splitting with a Spouse
CPP pension sharing allows couples to split their CPP benefits, potentially reducing the overall tax burden:
• Eligibility: You and your spouse or common-law partner must both be at least 60 years old and receiving CPP.
• Benefit: The total amount of CPP benefits remains the same, but splitting can result in tax savings if one spouse is in a lower tax bracket.
• Application: You must apply to Service Canada for pension sharing with both spouses agreeing to the arrangement.
Working While Collecting CPP
You can continue working while collecting CPP benefits, regardless of the age you start. Here’s what you need to know:
• CPP Contributions: If you are under 70 and continue working while receiving CPP, you must continue to contribute to CPP. These contributions will go towards the Post-Retirement Benefit (PRB), which will increase your CPP payments the following year.
• Income Tax: CPP benefits are considered taxable income. If you continue working, your employment income combined with CPP benefits might push you into a higher tax bracket.
• Earnings Exemptions: There are no earnings exemptions; all your earnings are subject to CPP contributions if you’re working and under 70.
Understanding the rules around years of contribution and their impact on payments, the benefits of CPP splitting with a spouse, and the implications of working while collecting CPP can help you make a more informed decision. Consulting with a financial advisor can provide personalized insights tailored to your unique circumstances, helping you navigate and optimize your retirement planning. By carefully evaluating your options and considering the long-term implications, you can make an informed choice that supports a comfortable and secure retirement.
