One of the most common questions we receive is when should I begin collecting my Canada Pension Plan? The answer is: It depends.
The earliest you can collect retirement CPP is age 60, and the latest is age 70. CPP benefits are reduced if they are collected before you reach age 65. Conversely, they are increased if you begin collecting after age 65.
There are many factors at play in determining when you should begin collecting CPP. Before you turn 60 it’s important to take a comprehensive look at your CPP options. Depending on your health, financial situation, and your plans for retirement, it might make sense to take a reduced monthly amount at age 60, or you may want to wait until 65 in order to receive the full monthly payment or defer until age 70.
Here are a few steps we review with clients who are unsure at which age to begin collecting CPP.
Step 1 — Gather preliminary information
Before setting out on the journey to determine when to begin collecting your CPP, it’s helpful to have all tax and My Service Canada Account information. The easiest way for us to review our client’s tax information is for them to grant us Level 1 CRA access. We wrote an article on the benefits of accessing and sharing your tax information with your Portfolio Manager, which can be found on our website.
To obtain the My Service Canada Account information, you can log in to your secure online portal that lets you apply, view your CPP statement, and update your information as it relates to CPP and Old Age Security (OAS).
The CPP statement provides some information and estimates regarding what you are entitled to based on your past earnings. The statement includes an estimate of your monthly CPP payment if you collect at age 60, age 65, or age 70.
The formula for collecting CPP early (before age 65) involves a 0.6 per cent reduction for every month that you collect CPP before the age of 65. The earliest you may begin collecting CPP is at age 60. Collecting CPP at age 60 would result in a 36 per cent reduction, calculated by multiplying 0.6 per cent by 60 months (five years multiplied by 12 months). This formula is a little too simple and doesn’t factor in a few important components that we will discuss below.
For each month you defer collecting CPP after age 65, you receive an additional 0.70 per cent increase, up to a maximum of 42 per cent when you reach age 70, calculated by multiplying 0.7 per cent by 60 months (five years multiplied by 12 months). There is no additional benefit for deferring your CPP past age 70.
Financial plan
In addition to the income tax and CPP information, we will pull a copy of the client’s financial plan prior to the meeting. All of this information is the foundation for the various questions we will ask.
Step 2 – Review basic CPP rules
Contributory period
Individuals can begin paying into CPP when they are 18 years old. Assuming an individual contributed to CPP from age 18 to age 65, this would represent 564 months (47 years x 12 months). The CPP statement will provide an overview of the contributions.
Low-earning years
Before making a decision, it is important to review the impact of low-earning years on the benefit formula. The general rule is that you can eliminate your eight lowest earning years by calculating the base component of your CPP. This elimination will ultimately increase the amount of your pension as the calculations are based on how much you have contributed and for how long.
If you do not work after the age of 59, and choose not to begin collecting CPP early, then you will be adding years with zero earnings. If you add five years with zero earnings, then you should not necessarily expect to receive 36 per cent more CPP by waiting. If you plan on working part-time after age 59, consider estimating your potential earnings between age 60 and 64. If you provide those estimates to Service Canada, they will be able to assist you with the calculations.
On the flip side, if you have always reached the maximum pensionable earnings contributions throughout your life, you may have no low-income earning years. If that is the case, then you should expect to receive 36 per cent more if you wait until 65 to collect, even if you do not work after age 59. This is because those last five years would be included in your eight lowest earning years.
To find out how retiring at age 59 and collecting CPP at age 65 would impact your CPP, you can call Service Canada and ask them to run a scenario to find out how much you would begin receiving at age 65 if you have zero earnings for the next five years. If your CPP has been maximized your whole life, this amount should not change — but it is always best to confirm.
One way to qualify for early CPP (between the ages of 60 and 64) is to earn less than the current monthly maximum CPP retirement pension payment in the month before your pension begins and in the month it begins.
Another way to qualify for early retirement CPP is to stop working. The term “stop working” means that you are not working by the end of the month before the CPP retirement pension begins, and during the month in which it begins.
For example, if you want your pension to begin in September, you must stop working by the end of August and you cannot work during the month of September. You could begin working part-time or full-time after September and continue to collect CPP at the same time.
If you are in a position to stop working at age 60 for a period of time, you may want to consider applying for CPP early. One component that is often missed in the decision process is the ability to stop paying into CPP.
CPP began in 1966 and chances are you have paid into CPP for many years through small withholdings on each paycheque. The amount paid in is based on your earnings up to a yearly maximum. Self-employed individuals pay based on their net business income, after expenses.
The maximum pensionable earnings for 2022 are $64,900, up from $61,600 in 2021. Individuals who earn more than $64,900 in 2022 are not required or permitted to make additional contributions to CPP beyond that amount. Individuals earning less than $3,500 annually do not need to contribute to CPP.
The employee and employer contribution rates for 2022 also increased from 5.45 per cent up to 5.70 per cent. This essentially means that you as an employee may have to pay up to the maximum of $3,499.80 in 2022, and your employer matches up to $3,499.80 for a combined maximum of $6,999.60. The employee portion of the contribution is generally withheld from your paycheque.
Let’s look at an example. Jill is soon turning 60 years old. This year her employment earnings are expected to be approximately $50,000. This figure is between the minimum contribution level of $3,500 and the maximum of $64,900 for pensionable earnings.
If Jill’s earnings are what she expects, then Jill will be required to make contributions to CPP of $2,650.50 calculated as follows: ($50,000 – $3,500) x 5.70 per cent. If Jill were self-employed, she would be required to contribute both the employee portion of 5.70 per cent and the employer portion of 5.70 per cent, for a total required contribution of 11.40 per cent. In this scenario, it would equate to $5,301: ($50,000 - $3,500) x 11.40 per cent.
Important point: One of the biggest benefits of collecting CPP early is that once you begin collecting CPP you are no longer required to remit CPP if you begin working again. This is especially important if you think you may work part-time after age 59 and before age 65.
If you are already exempt from paying into CPP, you should notify your employer to ensure they are not withholding a CPP portion from your pay cheque. At the end of the year, you should also double-check to see if your employer has the CPP correctly stated on your T4.
Individuals who are not yet exempt from CPP may want to discuss with their employers a short-term retirement period. This would benefit the employer as well because they would not have to pay the employer portion of CPP. If this can be co-ordinated during a slow period for the business, then everyone wins.
More people are choosing this type of arrangement. By working part-time, after your “one-month retirement period,” you may be in a lower tax bracket with no CPP withheld on each of your pay cheques. In Jill’s case, she could save at least $2,650.50 each year by stopping work once for the period required by CPP.
The decision to collect CPP early is often dependent on whether you have stopped working, or whether you can stop for a period of time to qualify. Once you reach age 65 you automatically qualify regardless of if you continue to work.
If it makes sense for your situation, we like the idea of the government paying you money for five additional years. This is certainly better than the alternative of having to continue to fund CPP. There is also the saying that a dollar today is worth more than a dollar tomorrow and you would receive five years more worth of payments.
However, before making this decision it is important to always do the analysis to determine which is best for you because it might not make sense to collect early.
Child-rearing election
When we first open accounts with clients, we ask them to complete a family tree. One of the many reasons for requesting this information is to learn about your family. For example, did you take time off to raise your children when you were younger? If you took time off to care for children, then we want to make sure that you complete the ISP1640 child-rearing provision form.
This form is typically completed in conjunction with the ISP1000 application form for the CPP retirement pension. You will have to provide the name, birth date, and social insurance number of each child.
Above we mentioned that the eight lowest earning years are excluded from the calculation. If you qualify for the child-rearing election, then the number of years increases, so it should result in an increase in the CPP retirement amount.
You qualify if you had children born after Dec. 31, 1958, had lower earnings because you were the primary caregiver of a dependent child under the age of seven, and you or your spouse received Family Allowance payments, or qualified for the Canada Child Benefit.
Genetics is a key factor
Another reason why we ask for a family tree is to obtain information about your parents. Providing the date of birth and current age or date of death enables us to have a discussion about genetics.
When it comes to some decisions with CPP, it may be advantageous to defer collection if you feel that you will live longer than the average life expectancy. If both of your parents lived into their 90s, and you are in great health then, in some cases, deferring collecting to age 70 to get a higher monthly amount may be a good decision.
On the flip side, if you have health concerns and feel that you will live less than the average life expectancy, collecting early at age 60 may be a prudent decision.
In my years as a Portfolio Manager, I have seen some clients pay into CPP their entire life and pass away before collecting the retirement benefit. Their estate would receive only the survivor benefit of $2,500.
Financial plan and cash flows
Another key deciding factor for when to start taking CPP is whether or not you need the funds for cash flow. In other situations, we are mapping tax efficient strategies and the timing of when to collect CPP is implemented into that plan.
Service Canada provides the administrative function for CPP. If you are speaking with one of the representatives and asking for advice, chances are they will let you know that they cannot provide advice. They do, however, have the tools to run different scenarios if you instruct them with the information.
There are many different factors that need to be integrated. We recommend obtaining an understanding of the CPP basics and gathering all the relevant information noted above. We also encourage having a specific discussion with your Portfolio Manager to discuss the timing that is best in your situation.
Step 3 – Apply for CPP
One of the items to note is that CPP is not automated. You must apply to receive these benefits. Our recommendation is to apply for CPP several months before the start date to ensure sufficient time for your application to be processed. You can apply for CPP online, in person, or by regular mail.
Apply online
Information on the Canada.ca website indicates that online applications for CPP take seven to 14 days to process. If you apply by delivering the application to a Service Canada Centre, or by regular mail, the process can take up to 120 days. My recommendation is for clients to apply online.
If you are unsure of when to begin collecting your CPP, break it down into the above steps and assess all factors. Each individual’s situation is different. While it may sound enticing to defer to receive a larger monthly payment, it’s important to take a step back with all the information and run the numbers that are specific to your situation. This is something that we are happy to help all our clients do to make sure they get the most out of their CPP.
Kevin Greenard CPA CA FMA CFP CIM is a Senior Wealth Advisor and Portfolio Manager, Wealth Management, with The Greenard Group at Scotia Wealth Management in Victoria. His column appears every week at timescolonist.com. Call 250-389-2138, email greenard.group@scotiawealth.com, or visit greenardgroup.com.
