Often one of the most frequently asked financial planning questions relates to when to collect Canada Pension Plan (CPP). The earliest you can collect retirement CPP is age 60, and the latest age is 70. There is no benefit to delay collecting CPP beyond age 70.
Before you turn 60, we recommend you meet with your Portfolio Manager to have a discussion about your Canada Pension Plan options. Prior to having this meeting with clients, we review both their income tax and CPP information.
Step 1 – Gathering preliminary information
The easiest way for us to review our client’s tax information is to have our clients sign the Government of Canada T1013 Form – Authorizing or Cancelling a Representative. On July 3, 2020, we wrote an article on accessing and sharing your tax information.
In this same article, we discussed the benefits of the My Service Canada Account (MSCA) which is a secure online portal that lets you apply, view, and update your information as it relates to Old Age Security (OAS) and CPP. There are multiple ways to sign into the online portal, including signing in with Government of Canada Key (GCKey), signing in with your bank, and signing in with your province.
Sign in with your bank
We recommend all of our clients set up online banking capability. Once a client has a Scotiabank card and online access, they can use both the card number and password to sign into their MSCA. With Scotiabank, they will ask you three security questions, from the five you provided when setting up the online access (i.e. What is the name of your first pet?). When first setting up online banking, we recommend printing these questions and answers out and putting them in safekeeping. The Scotiabank card number, password, and the answers to your security questions can gain you instant access to your MSCA to print off your CPP and OAS statement.
Sign in with your province
Alternatively, if you have a mobile device, such as an iPhone, iPad, or android device, you can download the BC Services Card app. You will also need your BC Services Card number (same card that is combined with your Driver’s Licence). Typically, this process takes about five minutes. This process enables you to also gain access to your MSCA to print off your CPP and OAS statement.
Sign in with GCKey
The GCKey enables you to access the Government of Canada’s online services. In order to use this approach, you will be asked to provide a personal access code (PAC). You can request the personal access code online, and they will mail it to your address on file. We encourage all of our clients to obtain a PAC.
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 of the basic CPP rules
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.
Information on the Canada.ca website indicates that online applications for CPP take 7 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.
Reduction in benefits
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 (5 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.
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 (47 years x 12 months) 564 months. The CPP statement will provide an overview of the contributions.
The general rule is that you can eliminate the lowest 17 per cent of your lowest earning years when calculating CPP. For example, if you began contribution at age 18 and retired at age 65, you can remove 8 of your lowest income years in determining your CPP (47 working years multiplied by 17 per cent). Before making a decision, it is important to review the impact of low-earning years on the benefit formula. 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.
The CPP Earnings and Contribution statements will also outline those years where you have split credits. Clients who have gone through a divorce or separation will often have credit splits on their CPP statements.
When we first open up 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. Going through this process will result in an increase to the CPP retirement amount.
Genetics 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 $2,500.
Financial plan and cash flows
One of the key deciding factors 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.
Kevin Greenard CPA CA FMA CFP CIM is a portfolio manager and director, wealth management, with The Greenard Group at Scotia Wealth Management in Victoria. His column appears every week at timescolonist.com. Call 250-389-2138. greenardgroup.com