January 1, 2012 is an important date for Canada Pension Plan because the new CPP rules come into effect.
I’ve written extensively about the issues around taking CPP early. It’s one of the big conundrums of Canada Pension Plan and my conclusion has always been that it makes sense to take CPP as early as you can in most cases. Does the results change given that there are a new set of rules coming? Here’s four questions to ask yourself in determining if it makes sense to take CPP early.
Will you still be working after 60?
Under the old rules, you had to stop working in order to collect early CPP. The work cessation rules were confusing, misinterpreted and difficult to enforce so it’s probably a good thing they will be a thing of the past.
Starting January 1, 2012, anyone turning 60 can start to collect Canada Pension Plan as soon as they turn 60. You don’t have to stop working. So now, the conundrum of taking CPP early will be an issue as soon as you turn 60. You can still be working and apply to collect it early but the catch is you have to keep paying into CPP even if you start collecting it early. The good news is paying into it will also increase your future benefit.
What is the mathematical break-even point?
Under the old rules, the decision to collect CPP early was really based on a mathematical calculation of the break-even point. With new rules coming, every Canadian needs to understand the math. Here’s an example of two twins I used before:
“Janet and Beth are twins. Let’s assume they both qualify for the same CPP of $502 per month at age 65. Let’s further assume, Beth decides to take CPP now at age 60 at a reduced amount while Janet decides she wants to wait till 65 because she will get more income by deferring the income for 5 years.
Under Canada Pension Plan benefits, Beth can take income at age 60 based on a reduction factor of 0.5% for each month prior to her 65th birthday. Thus Beth’s benefit will be reduced by 30% (0.5% x 60 months) for a monthly income of $351 starting on her 60th birthday.
Let’s fast forward 5 years. Now, Beth and Janet are both 65. Over the last 5 years, Beth has collected $351 per month totaling $21,060. In other words, Beth has made $21,060 before Janet has collected a single CPP cheque. That being said, Janet is now going to get $502 per month for CPP or $151 per month more than Beth’s $351. The question is how many months does Janet need to collect more pension than Beth to make up the $21,060 Beth is ahead? It will take Janet 140 months to make up the $21,060 at $151 per month. In other words, before age 77, Beth is ahead of Janet and after age 77, Janet is ahead of Beth.”
Another way to phrase this question is “When are you going to die?” This math alone is a very powerful argument for taking Canada Pension Plan early.
Under the new rules, the mathematical break-even point changes because they will be increasing the reduction from 0.5% per month to 0.6%. In the above example, Beth would get $321 instead of $351 at age 60. This moves the break-even point to age 74 instead of 77.
If you want to see the new breakeven points for 2012 to 2016, visit Taking CPP early: The new breakeven points
When will you most enjoy the money?
When are you most likely to enjoy the money? Before age 74 or after age 74? Even though the break-even point is three years sooner, for most people, they live the best years of their retirement in the early years. I call these the ‘go-go’ years (which is one of three phases of retirement).
Some believe it’s better to have a higher income later because of the rising costs of health care. Whatever you believe, you should plan for. It might be worthwhile to look around your life and see the spending patterns of 70, 80 and 90 year olds to assess how much they are really spending. Are they spending more or less that they did when they were in their active retirement years.
What happens if you Leave money on the table?
Let’s go back to Beth who could collect $321 at age 60. Let’s pretend she gets cold feet and decides to delay Canada Pension Plan one year to age 61. What’s happened is she ‘left money on the table.” In other words, she could have taken $3852 from her CPP ($321 x 12 months) but chose to leave it to get more money in the future. That’s fine as long as she lives long enough to get back the money she left behind in the first place. Again, it comes back to the math. For every year she delays taking CPP when she could have taken it, she must live one year longer at the back end to get it back. By delaying CPP for one year, she must live to age 75 to get back the $3852 she left behind. If she delays taking CPP till 62, then she has to live till 76 to get back the 2 years of money she left behind. Why wouldn’t you take it early given this math? The main reason is you think you will live longer and you will need more money the older you get.
My two cents
I think if people understand the math of Canada Pension Plan, most people will take it early. In 2012, you can take it early even if you are working. The bad news is you will get hit with a bigger reduction with the new rules. Some say its also bad news because you will have to keep paying into CPP if you are working (under the new rules). To me, that’s not such a bad thing because paying into it also increases your future benefit so it’s not like you are not going to get your money back. I don’t think the increased reduction is enough of a deterrent because a bird in your hand is better than two in the bush.
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Jim, a good article as usual. I’m also a financial planner and I always recommend clients take early CPP if they can. But one factor you’ve neglected to account for is what does the early bird do with that reduced benefit cheque? Even applying a measley 1% growth to the extra income blows the doors off the argument to wait. If there’s debt that can be paid down/off,the benefit is even sweeter.
Another option would be to take the reduced benefit cheque that you get every month between ages 60 and 65 and, if you don’t really need the money yet, deposit it in your TFSA (to a max of $5000 per year or more if you haven’t started one yet) in a quality equity income fund that pays dividends (or something safer if you wish) and then watch it grow tax free. The amount of your CPP benefit that is greater than $5000 could be placed in a non-TFSA investment vehicle that produces good returns. You could have a nice little nest egg sitting there to enjoy by the time you turn 65 (perhaps in excess of $50,000) that would require you living a lot longer than 74 to equal (if you had chosen to wait 5 years for the non-reduced benefit cheques that would only have added a few thousand dollars to your annual income). And if you wish, you could keep the nest egg invested and potentially earn returns that would exceed the additional income from the non-reduced benefit cheques for as long as you live.
One thing that no one seems to be considering is the high tax you will pay on the CPP benefit if you continue working from 60 to ??. If you take it later your income will probably be reduced and so little or no tax will be paid. I am sure this could be built into a model taking individual circumstances into account.
This is only a factor if you know when you are going to die. An after tax dollar is always better than zero dollars.
I am turning 60, am taking my CPP early and will keep working and contributing to it to grow the benefits. Taxes?? No problem – I have $45,000 worth of head room in my RRSP and that is where my monthly CPP will be invested.
Wouldn’t it be better to put it in a TFSA account? If you put it in an RRSP you will have to pay tax when you withdraw it. Also with a TFSA you can withdraw if you need funds.
You guys are lucky in Canada.
Why?
Because we have a hockey team in Winnipeg.
I thought maybe it was because we have an actual pension FUND for CPP whereas Social Security in the US does not. Contributions by workers just go into general revenue to pay the bills and when they need to pay retires benefits they just print new money and pay it out.
Jim:
I am also a financial planner who used to nearly always recommend early CPP. One other factor in favour of starting ASAP is the level of government debt (yes even in Canada) could mess with ability to pay a fully indexed CPP in the future.
However, now I have changed my view. My belief is that those who are likely to live another 15-20 years, will likely have a lifespan of 100+ AND they will continue to be active and in good health.
That means the risk of outliving savings is higher, and the benefit of a larger pension is enhanced.
Really enjoy the Blog!
Thanks,
Michael at http://www.RetirementSingularity.com
Question: My job ends in July 2011 and I will be getting a severance package in 2011 which will meet exceed my income needs during 2011. I will be 62 in June 2011. Should I apply for my “reduced” CPP to start in December 2011 or January 2012? Would there be any significant difference in the CPP payment due toi the change from old to new rules?
Thanks for the comment and question. It’s near impossible to advise under these circumstances with such limited information.
The advantage of being on the old rules is the reduction of 0.5% instead of the greater reductions under the new rules. That being said, the new reductions are being phased in over 5 years so the penalty for delaying CPP till 2012 is not that big.
Just remember, every year you delay CPP, you have to live one year longer to get the money back you left on the table. Good luck with your decision!
As an American I’m mostly familiar with Social Security, which you should generally always take as late in life as you can (unless you have debt that you need to repay, etc.) It’s really interesting to hear about CPP in Canada and all the reasons it might be wiser to take it early.
@Paula, why should you take Social Security early? Why is the math different?
I’m turning 65 Sept. 2012 planning to retire but
work part time some people say I should wait
until 65 to collect CPP should I wait or collect it now
Thanking you in advance
Hi Jim, I just turned 60 in mid August. I have a wife and daughter, daughter is 8. I am concerned with health. I would like to know if I should apply now for CPP. I am not sure of the benifit to my wife and child if I pass. In my mind, I should apply but what do you think?
Terry
@Doug and @Terry
I really appreciate the question but it is impossible for me to answer a direct personal question like that in this type of forum. In the article, I think I have clearly articulated my general bias to take CPP early when you can but proper planning requires personal anaysis and a lot more information. You should seek professional advice if you are unsure.
Good luck!
Jim
Hi Shaohao,Very Cool! I will make the change.Did you crteae a project or use the bat files in the test area?I have had teal on windows in the past. I just don’t have the bandwidth to keep up. Would you be willing to test a new release on Teal on windows? I plan to release once every three months or so.Yes, I did have a portable mutex class in some previous revs of teal. It’s actually really a better way. Please feel free to modify teal to have such a concept and I will merge the changes into the mainline. The class interface can be simple:class teal_mutex_internal {public: teal_mutext_internal () : acquired_ (false) {} virtual ~teal_mutex_internal () {}; void acquire () {assert (!acquired); acquire_ (); acquired_ = true} void release () {assert (acquired); release_ (); acquired_ = false}protected: virtual void acquire_ () = 0; virtual void release_ () = 0;private: teal_mutex_internal (const teal_mutex_internal ); void operator= (const teal_mutex_internal );}Take care,Mike
Huh?
Did you consider that Janet is contributing an additional 5 years while Beth is not. Beth will take a little longer to catch up because she also has to recoup her 5 additinal years of payments. My own calculation says it’ll take me 20 years to catch up … so I’m collecting at 65 vs 70. It’s also advantageous for me to not collect before 65 because of my CPP/RPP blend … my RPP is reduced by whatever my CPP is at age 65.
Ooops … Did you consider that Janet is contributing an additional 5 years while Beth is not. Janet (not Beth) will take a little longer to catch up because she also has to recoup her 5 additional years of payments. My own calculation says it’ll take me 20 years to catch up … so I’m collecting at 65 vs 70. It’s also advantageous for me to not collect before 65 because of my CPP/RPP blend … my RPP is reduced by whatever my CPP is at age 65.
Now, because I like what I do, I’m still on the job, no longer contributing that 7% to my RPP because that’s paid up so that’s effectively a 7% raise… and I’m collecting CPP as well … another ~ 7% raise. I’ll do this for another year or two I think, then pack it in.
I think a coule of items were missed in the oversimplied calculation
1- add to the fund for the period age 60 to 65 the following – amounts not paid into cpp as opposed to just spending those dollars – if working the new rules require payment (I think) and thus increase the benefits – and reduce the income spreads between taking cpp at 60 versus 65
2- add interest ( less tax on interest) say a net return of 2% . the return will depend on the investment chosen for the new funds being accumulated. If the use of the cpp and saved contributions is paying off a creditor -(example) house mortgae Then the rate of return received increases the break evn point tomuch later
and always remember
if you die before breakeven point- you just made a volantary donation to the government cofeers – for which I thank you !
We have 2 situations in our home
1. My husband started to collect at age 60 as he is not working and therefore would be adding zeros to the averaging of his contributions each year and would have made less each year if he waited.
2. In my case I am adding max contributions at this point in my life. Each year I am told I would make more at 65 because of 1. Not being penalized for claiming early. but 2. Especially because of added contributions to my plan,I am helping to compensate for low contributions in earlier life. At 60 I was told that I could draw $484.
Now I am told I could get $786 at age 63. that seems like a good incentive to wait. Also if I were taking the pay out I would be paying higher tax on it as I am still working. Comments please.
I took my CPP pension early and combined it with my LAPP pension.
I have some questions:
(1) I started to combine CPP and LAPP when I was 60.I am now approaching 65 and will soon have to pay back the CPP portion. In other words, the CPP will be (a) removed from my LAPP pension, and then b)I have to pay back the CPP ‘loan’.
I would like to get payback details (interest rate, term etc) from CPP, so that I will know how much in total I borrowed, and how long it will take me to pay it back (through LAPP)
I realize that I benefitted for a specific time, and therefore should repay with in a specific time.I might want to reapy a lump sum rather than having CPP repay the loan back to CPP over, say, 5 years (which I estimate it should take).
Thank tyou,
Peter Davies
PH: 250-452-9191
“Pay back” CPP?!?! Never heard of such a thing. I’m a Financial Planner and I’ve seen lots of pensions but this is a new one on me. Are you sure you have to do this? Many pensions pay a bridge amount because they assume people wait till 65 to start collecting CPP so they give you the bridge payment to give you a level income throughout your retirement. So if you start CPP early you will experience a drop of income when the bridge payments cease at 65 but then OAS picks up much of that slack. But I’ve never heard of a requirement to pay back the CPP you received.
Jim,
I started taking my CPP last July 2011 at age 62. Since then I started working as a mortgage broker but since Aug 2011 (past 4 months) have had severve back problems that has made me incapable of working. I am scheduled for a back opertion over the next 2 months which is supposed to alleviate the problem/ pain however there is no guarantee of success. Should the back problem continue after surgery and it becomes a chronic condition can I apply foR the CPP disability benefit to augment the monthly CPP amount now rec’d?
Since you’re already receiving a CPP retirement pension, the only way that you can qualify for a CPP disability benefit is if your disabling condition existed and was “severe and prolonged” prior to the date that your retirement benefit started. Unfortunately, that’s one of the downsides to taking your CPP retirement pension early.
Thanks for replying to Mark Doug
Jim
I turn 60 in April and I am applying for my CPP. I will continue to work past 65 and know that I have to continue to pay into this. How does this work? Does my business still take the maximum amounts out of my pay check and do I have to tell my employer that I am starting to collect my CPP . Will my income be lower if I start taking my CPP out at 60
Judy
You’ve got several questions here, but I’ll do my best to answer them all.
Firstly, as of 2012 you MUST continue contributing to CPP if you continue working after starting to receive your CPP retirement at age 60, and you MAY continue contributing even beyond age 65. For now then, there is no need to advise your employer that you’re applying for CPP, as they have no choice but to continue making deductions and contributions. Once you turn 65, you will have to let your employer know whether you want to continue to contribute to CPP, as it is optional at that point, and they may stop deducting and contributing unless you ask them to continue.
When you ask “will my income be lower”, I assume that you mean your CPP retirement pension. If so, the answer is yes. For benefits starting in 2012, it is reduced by 0.52% for every month that you are under age 65 when your benefit starts (a total of 31.2% at age 60). Then again, each year that you continue to work and contribute after starting your CPP retirement benefit will earn you a post-retirement benefit (PRB). Roughly speaking, a year of contributing at the YMPE will get you a PRB of approx $25/mth starting January of the following year, subject to the adjustment formual based on your age at that time.
My wife has a much lower income than I do. If I take CPP at 60, would the amount of the survivor pension available to her be lower than if I took CPP at 65?
Thanks
Yes it will. Also please note that a survivour pension and a regular pension combined cannot be greater than the maximum regular pension.
Its also interesting for those needing/wanting to decide when to start their cpp that they need to be cognizant of how much they have contributed. In my case I have 37.25 max contribution years and won’t be contributing more. Therefore if I wait until after age 62 years 11 months to start it I will have diminishing returns because I won’t have the maximum contributions required to get the maximum available. Many people have a lot less than the maximum and because the CPP is based on potential contributory years (42 to 47), established at the time the CPP is started, they are affected negatively the longer they wait .
I’ve used the pending 17% dropout factor in the below calculations.
Age 60 Max reduced pension requires 34.86 yrs. max contributions.
Age 61 Max reduced pension requires 35.69 yrs. max contributions
Age 62 Max reduced pension requires 36.52 yrs. max contributions
Age 63 Max reduced pension requires 37.35 yrs. max contributions
Age 64 Max reduced pension requires 38.18 yrs. max contributions
Aged 65 Max un-reduced pension requires 39.01 yrs. max contributions
Neil
I hate to disagree with Dave, but the simple answer is that the amount of survivor pension payable to your wife is NOT reduced if you take your CPP at age 60 instead of age 65 (ie., the survivor benefit calculation is based on your calculated unreduced retirement benefit).
The slightly more complex answer is that if you don’t apply for a retirement pension T ge 60, it depends on whether you’re working between age 60-65, and whether your average lifetime earnings is going up or down during this period of time. That is what will affect the calculation of your survivor’s benefit.
Doug
Thanks for correcting me. Neil sorry my answer “Yes it will” answer was wrong.
Dave
On a different issue.
If you have/obtain 39 maximum years of contributions at age 57 or anytime before age 65 you are not gaining any benefit for your contributions.
I work for the government my pension will be clawed back when I turn 65. I am turning 60 next year would it make even more sense to take CPP early based on the clawback or is this a non issue?
Thanks,Ian
P.S. It is my intention to work at least 2more years as I will have 35 years in at 2013, max pension 70%.
Ian
I suspect you’re referring to the clawback (or offset) of the CPP from your government pension plan, rather than the OAS clawback. If I’m wrong though, accept Dave’s answer and ignore me.
If it’s your federal or provincial government pension “clawback” that you’re talking about, you really should get the specifics from your HR dept. Based on my knowledge and experience though, most governments will offset at age 65 by an approximation of what your age-65 CPP would be, based on the contributions that you made to CPP while working as a government employee.
In a nutshell, that means that if you apply for CPP at age 60, you’ll be in a windfall situation until age 65, at which point the clawback or offset may exceed your reduced CPP benefit. The good news though is that the OAS also kicks in, so you’ll probably be further ahead at that time anyway (unless you’re one of those lucky folks who’s subject to 100% clawback of the OAS, as explained by Dave).
Confused yet?
Terminology. The CPP Bridge benefit or offset does not get “clawed back”. The benefit is awarded to those with defined benefit CPP integrated pensions who start drawing their pension at an age less than 65. Those people will have been clearly told that it would stop at 65 and there was never any intention to pay that amount beyond that age. It does not get clawed back into your pension plan; It stops and it stops because you never paid to receive it beyond 65. The definition of a clawback is;
1. Money or benefits that are distributed and then taken back as a result of special circumstances.
Reading Doug’s answer, his suspicions, I expect, are very right and something I should have picked up on given the subject matter of the blog.
To be clear my entry here is not intented to be directed at Doug or Neil, only to be helpful to others reading this stuff and learning about pensions.
Sorry I meant Ian not Neil.
Dave
Good clarification! Sometimes terminology is everything. I know that it feels like a clawback when they take away something that you’ve been receiving for several years, and some people get very upset over it. I agree though, you only get what you pay for. Thanks Dave.
Hi Ian,
The only pension that gets clawed back of course is the Old Age Security (OAS). If you expect that your OAS will be fully clawed back; meaning you have income in 2012 dollars of more than $112,272, then adding any income, CPP or otherwise beyond that amount is not affected by the OAS claw back provisions. You will pay only the applicable income tax rate. In other words if you believe after 65 you will not be eligible to retain any of the OAS then when to start your CPP and therefore the amount of CPP being added to your income is irrelevant.
If your income is between (2012) 69,562 and 112,777 then adding income would effectively push OAS higher into that range forcing it to be clawed back at the rate of 15% per hundred dollars. It seems from your long work history that you may be entitled to max CPP. (2012 rate 987.00 per month). So the issue would be adding (age 65 CPP) of $11844 to your income or adding (age 60 CPP) of approx. $8006 to your income. The difference being 11844 – 8006 = $3838. Adding $3838.00 to your income would effectively incur the 15% ($575.70) claw back in addition to whatever income tax is payable.
While I would want to know more about your particular situation; on the face of what you have presented I would likely start your CPP when you retire at age 62 or sooner.
Hope this helps.
Dave
My husband retired with a government pension after 35 years and now has a bridge CPP to age 65 of $725/month. So am I to understand that at age 65 the bridge $725 would be cancelled and replaced by CPP at the same amount?
Mary
You’re at least half right with your understanding, and that is that his $725/mth bridge will end at age 65. His CPP will start whenever he applies for it, between 60-65. If he applies for it at age 65, the bridge was meant to approximate what the CPP would be for the years that he worked for the government, so it may indeed be somewhere in the neighbourhood of $725/mth. It often is actually a little higher than the bridge amount. If he applies for his CPP earlier than age 65, it may be lower than the bridge amount, but he will be receiving it for a longer period of time.
I will be 62 in September 2012.
If I were to take my CPP now, and if for some reason I became unemployed before age 65; would this affect the amout of EI I could receive, if any at all?
Thanks, Tom.
Potentially it could depending on your income level and if you have been on EI before.
Check out this link.
http://www.taxtips.ca/cppandei/eiclawback.htm
I will be turning 60 in Dec/12. I don’t have a company pension plan but have saved up over of the years.
In todays economy, Just in case I lose my job Just wondering if it would be in my best interest if I collect CPP at 60 or should I wait until 65?
Thanks in advance…Ed
The econonmy and the liklihood of job loss arn’t relevant in making the decison whether to start it at 60 or 65. There is no absolute right answer.
To be clear its not 60 or 65, you can start it anytime after age 60. So if you lost your job at say age 62 you could start it then, at a higher rate.
If you’ve read Jim’s colum above he sets out the issues pretty well. It really just depends entirely on your own specific situation, money needs, and how long you think your going to live.
Thank you for actually explaining CPP for me I now know I should take the payment early.
All the best Jack
I am 59 and am considering applying for early CPP @ age 60.I am presently collecting total disability (75% from my employer’s insurer and 25% from Canada Disability Pension). I have been employed with my employer for 35 years. I have been collecting total disability income for the last 5 years of these 35 years. Would the disability money that I collect at present, reduce/impact my early CPP? Would the fact that I have been on disability over the last 5 years reduce my CPP entitlement? Thanks.
GROise
You can’t receive both a CPP disability pension and an early CPP retirement pension. They are mutually exclusive!
What will normally happen (assuming that your disabling condition doesn’t improve to the point where you would be employable), is that your CPP disability benefit will convert to a CPP retirement benefit at age 65. This “conversion” will normally be a reduction, but it’s accompanied by eligibility at age 65 for the Old Age Security pension, so you should see a net increase in your government benefits at age 65.
I am self employed and I am trying to decide if I should continue to take a salary vs. dividends. The reason I have taken a salary is to be able to contribute to CPP, because for most of my career I was an employee and paid into CPP.
I currently have contributed the max to CPP for 27 years , out of a possible 34 years. I am 52 years old. When I run an estimate monthly CPP benefits from service canada website, it tells me that ” if you were 65 today, you would receieve a monthly retirement pension of $975.07″.
Does this mean that if I stop contribuing to CPP, that I could expect to receive the inflationary adjusted equivelent of $975.07 per month in 13 years, when I’m 65?
I’ve called the service canada service line and did not get much help answering this question.
Thanks in advance to the bloggers that reply ,I appreciate it.
Laurie
No, there is no attempt in the CPP estimate system to anticipate inflationary impacts. Estimates are always based on current dollar values.
There are/were two different estimate systems used by CPP. One “pretended” that you were age 65 presently, and used your existing 27 years of contributions to calculate a current retirement pension. The “if you were 65 today” heading was what was used for that system, but your estimate shouldn’t be as high as $975.07 using that system. The max pension for 2012 would be $986.67, and if all 27 of your years of contribution were at YMPE, that would only give you a pension of approx $859.36 if we pretended that you were 65 now ($986.67 / (84% of 37 years) x 27 years).
The other system projected your last year of earnings until age 65, and did an estimated calculation, but still using 2012 dollar values. It sounds like that is the calculation that was done for you, but we used to say “if your earnings continued to age 65 at the same level as currently”.
In either case, the best estimate for your CPP at age 65 if you stopped contributing now would be to say that you will receive 69.2% of the maximum (27 years at YMPE divided by 83% of the possible 47 years of contribution). Using 2012 values, that would work out to $683.08 monthly. This will be adjusted by whatever increases there are in the YMPE over the next 13 years, but it’s probably more meaningful to keep things in current dollar values.
Does this make any sense?
Hi Doug,
Yes, I understand – thanks for explaining it so well. Service Canada could use you! With the information you provided I now understand how CPP is calculated and the implications if I stop contributing.
Thank you.
Laurie
Glad that my explanation was helpful. Since you have the choice to contribute or not, another way of looking at the cost/benefit is to compare the cost of contribution (9.9% for each year of earnings) versus the payback in terms of annual CPP retirement benefits (25% of each year’s earnings averaged over 39 years = 0.64%). On that basis, the makeup time for each year of contributions is about 15.5 years after age 65.
This calculation only acknowledges the value of the CPP retirement pension though, and you should also consider the potential value of CPP disability benefits as long as you maintain contributions during 4 of the last 6 years, as well as death/survivor benefits.
Service Canada paid for my services for 32 years. Now I give it away for free!!
Thanks again for providing very valuable information. Service canada lost a very knowledgable employee when you left:)
In reading your response re that make up time is approx. 15.5 years after age 65, Do you know what the make up time would be if CPP was taken at age 60 ( given the new rules of .6% per month)?
Again thanks in advance for sharing your knowledge.
Laurie
In response to your followup comment below (no reply button there), thanks for the kudos. I’m very glad to be able to share my knowledge in this form.
As to your question, the math changes a bit if you take the CPP retirement at age 60, because it’s reduced by 36% as you suggest, and because the earnings are averaged over approx 35 years (your best 83% of 42 years) instead of 39 years. The new makeup period is therefore 64% of 25% of 1/35 = 0.46% return for the same contribution of 9.9% = 21.5 years. Starting at age 60, you will recoup your “voluntary” contribution at age 81.5, which is almmost the same as the above 15.5 years after age 65.
Hi Laurie I certainly defer to Doug on all things CPP, his info is excellent.
Here’s a link to a CPP calculator which shows various amounts and the break even points 60 vs 65 etc.
http://www.taxtips.ca/calculators/cppretirementcalc.htm
I have no connection with the taxtip site but refer to it often. Its very good.
Laurie/Dave
Hopefully my “makeup” answers are comparable to the website, but if not, they’re wrong!
Dave- thanks for the link- I agree the website is helpful.I have saved it in my favorites. The CPP calculator makes it easy to see the differnce ,in PV terms, of taking CPP at 60, 65 and 70.
Doug- Your information re the time it takes to make up my ‘voluntary’ contributions is valuable information for me to ponder as I evaluate whether to continue to pay into CPP or not. Thank you.
Hello,
I have read the info that you have posted and feel a little better about my dad’s Pension Plan.
I have some questions though and I was wondering if you can please clear those for me.
My dad’s job ended due to shortage of work and now he is on Employment Insurance (EI) from May 2012-July 2013. He has turned 59 on April 2012. So I was wondering is it wise/good for me to apply for him, for his reduced CPP now or should he wait until his EI is given (i.e. after July 2013?).
Thank you
Great article. The question I have is, should I take CPP early if I am currently getting CPP Disability? Will the monthly amount change? I know my Disability ends at 65. Thank you.
K
The answer to your question is NO, NO and NO!
In any case, you can’t receive both a CPP disability benefit and a CPP retirement pension at the same time. Unless your disability has ceased or improved to the point where it no longer prevents you from working, you should continue receiving your disability benefit until age 65, at which point it will convert automatically to a retirement pension (at a lower rate).
I am eligible to receive CPP but am going to continue to work part time . WhenI am not working, I am eligible to draw EI benefits. Can you tell me if I should apply for CCP while drawing EI and if there is a clawback on one or the other. I can’t seem to get an answer from service canada with regards to the best decision to make
I took early CPP in December 2011 without a work stoppage as many people have and am still having CPP contributions deducted from my pay…can I get that money back as I believe it is unconstitutional for the FEDS to make anyone stop working ?
Ray
I don’t really understand your question. What money are you wanting back? Your contributions since Dec/11?
Since I received my first CPP payment in December 2011 I thought I wouldn’t have CPP deducted from pay…but is has been deducted for all of 2012. Is this right ?
Ray
It used to be that you could no longer contribute to the CPP after you started receiving your CPP retirement benefit. That changed, beginning 2012.
Now, you MUST contribute up to age 65 regardless whether you are receiving CPP early, and you MAY contribute up to age 70 even if you are receiving CPP. The answer to your question MAY therefore depend on your age. If you are still under age 65, you definitely cannot get a refund, as those contributions are mandatory. If you are over age 65, you can opt not to contribute, but the question is whether Revenue Canada would allow you to exercise that option retroactively for 2012, and give you a refund.
The good news is that those additional contributions will create additional benefits for you, in terms of what is called a PRB (post retirement benefit). That benefit will be effective Jan, 2013 (although you shouldn’t expect to receive your first retroactive cheque until approx June/July 2013, after the tax returns have been processed a and the additional contributions are acknowledged by RCT). The amount of the PRB can be estimated at about $25/mth for a max earnings (approx $50,000), pro-rated if less than that. The PRB is also subject to the normal actuarial adjustment up or down, based on your age as of Jan/13.
The same process of mandatory/optional contributions for 2013 will apply to you, and if you contribute for 2013 you will be eligible for an additional PRB in 2014 and beyond.
But I thought since I started receiving CPP in 2011 I would be under the old rules and would not have to contribute anymore.
Ray
Nope, doesn’t matter when your CPP benefit started, if you’re under age 65 in 2012 or later, you MUST contribute to CPP on any earnings.
I believe that the strategy of taking CPP early in order to get as much money out of the plan as possible is wrong thinking. Instaed you should be more focused on how much you will receive each month and what you need to live on and how much tax will be paid on any income received.
A much better strategy is to delay CPP as late as 70 unless it is needed to exist or your health is poor. Delay CPP and remove money from your RRSP while your income is lower, I assume you are not still working. This strategy gives you the maximum monthly income at a time when you need it the most and who cares about the break even point. Will you be satisfied if you break even but do not have enough monthly income to live on.
This is the very first time I have ever communicated in an online forum, so please bear with my deficiencies. My husband has paid into CPP since 1968. Our birthdays are both in spring months and we are the same age. I only worked sporadically (raised children). Last Dec., on a lark, I applied for any CPP that might be mine and am now receiving a whopping $25. and change. Because of the old requirement of having to be off work to start the CPP, my husband did not apply. Now we are wondering if it would be in our best interests for him to apply in the “pension sharing” mode. Our question is this: as I am his only dependent and he claims me for the full eligible amount, would my receiving a portion of his pension put me in a position where he would lose me as a dependent? His income is in the $60.000 range. I only get the $25.ish from CPP. Your input would be great! Thanks. Elaine
Elaine
I will let others who know the income tax system better than I, respond to the issue of pension sharing versus claiming you as a dependent.
My response concerns only your CPP calculation, and whether you remember completing form for the “Child Rearing Dropout” or CRDO provision. If you’re not sure, it might be good to call or drop in at your nearest SCC just to make sure.
I took my CPP early at age 60 so it starts to pay me in a couple of days. I also have an OMERS pension which is indexed each year as per the cost of living. I understand the CPP is also indexed.
My question: Will my reduced pension be indexed each year. For example if my pension is based on 60% of the 2012 rate presently (roughly 674.00 when it is 60% of the maximum rate), will it again be indexed up at 60% of the new higher rate each year. It would seem logical. That said I received no CPP in 2012 (I thought I was supposed to start receiving payments the month of my 60th birthday which was Dec 8).
Sorry if this is long. Basically put is the reduced pension indexed as the full pension is? Thanks for a great site.
Larry
Yes, your reduced CPP pension is indexed each year, but not quite in the way that you descibe. Once you start receiving your benefit, it is increased each year in line with increases in the Consumer Price Index (CPI), which is based on the cost of living. The max benefit starting the following year is “indexed” (not quite the right word) by increases in the 5-year rolling average of the Year’s Maximum Pensionable Earnings (YMPE), which is based on changes in wages. Therefore, if prices are going up faster than wages, your benefit the following year might actually be more than 60% of next year’s max benefit, but if wages are going up faster than prices it might be less than 60% of next year’s max benefit.
Larry
I forgot to comment on your effective date. Under CPP, benefits are always paid at the end of the month following whatever created the entitlement. That means that your benefit will be calculated in 2013 dollars, not 2012 dollars. The negative part of this for you is that the reduction factor changed effective 2013, to 0.52% for every month you take it early, meaning that your benefit will be reduced by 31.2% instead of the 30% that it would have been in 2012 (meaning that you will receive 68.8% of whatever your age-65 entitlement would have been, instead of 70%). I’m not sure where your 60% came from, but I hope this clarifies things for you?
I’m confused. Say you start your CPP at age 60 and still work. (1) Doesn’t still paying into CPP somewhat off any benefit of collecting CPP early ? (2) If your collecting a reduced CPP because your taking it early, I though it was reduced forever… how does still payinto CPP change that ?
Bill
I can understand your confusion, because the CPP rules around contributing after you start your CPP retirement pension changed effective 2012. Prior to then, you are 100% correct, once your pension started, you could no longer contribute and your pension never changed, except for the annual CPI increased.
Since 2012 however, contributions are mandatory until age 65 regardless whether you’re receiving a CPP retirement pension or not, and they’re optional between age 65-70 if you are receiving your CPP retirement pension.
These additional contributions (manadtory or optional) made after you start your CPP retirement pension still don’t increase your existing CPP pension though. What they do do (I always like saying that) is create a new benefit, known as a post-retirement benefit or PRB. This is a new monthly benefit that is paid starting January of the year starting when these “extra contributions” are made, and is payable for life along with your current CPP retirement pension.
The amount of the PRB is approximately what your contribution would have increased your “regular CPP retirement pension” by if you hadn’t already been receiving that pension. A good estimate for a maximum contribution is approx $25/mth, adjusted up or down based on the normal CPP actuarial factor based on your age when the PRB starts.
I hope this helps a bit?
Thanks but I’m still a bit confused. If you start collecting CPP at 60 and keep working, are the contributions you still have to make after age 60 substantially less than before… since you say you’re only going to get a small $25/month PRB benefit ?
I don’t get it ? If I take ny CPP early at age 60 and continue working, I’m going to get about 32% less from CPP for the rest of my life. And out of that reduced amount I still have to pay contributions into CPP up until age 65. It seems to me, from age 60 to 65 I’m essentially over contributing by a couple of thousand dollars/year – only to get a couple of hundred dollars/year in PRB benefit! Does this raking CPP early make any sense… if I do it it (thought you’d like that one too) sounds like I’m getting the shaft, what am I missing here ?
Bill
Nope, contributions stay the same (4.95% for employee or 9.9% if self-employed, but as I say, benefits stay almost the same also. If you think about it, it takes 40 years of max contributions to earn a max pension of approx $1,000 mth. That works out to about $25/mth for each of those 40 years of contribution.
The PRB gives you the same rate of return, but it starts almost immediately, so that’s probably even a better return than on your “normal contributions”, because they’ve been sitting there for an average of 20 years.
Don’t forget though, that the PRB that I’ve quoted of approx $25/mth is for max contributions if you’re age 65. If your contributions are less than max or if you are less than 65, you have to adjust the $25/mth accordingly.
Thanks… but I’m not sure and I’m really going to have to rap my head around this one. Its important ’cause I turn 60 later this year… and, if possible, I’d rather not leave any money on the table. PS: I do appreciate the comments and opportunity for feedback !
Bill
If you haven’t yet decided whether to apply for your CPP early, the math does change a bit. I do do (there it is again) detailed CPP calculations as a business, and I can help you if you wish. I do charge $25 per calculation, but all I’d need is your CPP statement of contributions and some what ifs, around your future earnings. If this interests you at all, email me at “DRpensions@shaw.ca”.
Bill
My reply above was intended for your previous comment, so now I’ll try to address any leftover issues from your second comment.
I’m not exactly sure what you mean when you say that you’ll have to pay contributions out of your reduced CPP? You only pay contributions on earnings, not on your pension, if that makes you feel better.
I’m not sure why they made contributions mandatory up to age 65, but I don’t think you’re being shafted by the PRB. Your contribution costs you 4.95% of your salary (double if self-employed) and your PRB gives you a return of 0.625% (adjusted by your age factor starting the following year. The breakeven point for someone under age 65 is about age 71-73, so I don’t see that as too much of a shaft?
Why can I NOT earn income the month before I claim cpp? I intend to claim early at 60
Tanya
Since 2012, there is no longer any restriction to earning income in the month before you claim your CPP, so keep on working and apply at age 60 or whenever you feel is best for your situation.
I have been struggling with this decision for some time now. My wife and I are both retired federal public servants. She turned 60 in November and I won’t be 60 for a couple more years however we both receive what is known as a “bridge benefit” up until 65 years of age when it is then stopped and CPP kicks in. Since the bridge benefit equals CPP, if we took CPP at 60 at a reduced amount, once bridge benefits ceased at 65, would we not then be making less per month for the rest of our lives? I’d like to take advantage of the extra monthly income while we are relatively younger and healthy but I fear the eventuality of a decrease in benefits at 65 years of age? I also understand that I will likely take longer to reach the break even as per the new rules, meaning I’d receive a bigger deduction per month at 60 than my wife would.
Rick
I can appreciate your struggle, as I had the same decision to make, and I opted to start my CPP at age 60. My main suggestion is that you should get accurate numbers to make your decisions.
Firstly, the bridge benefit doesn’t necessarily equal your age-65 CPP retirement pension. What it attempts to do is approximate the CPP for the years that you contributed to superannuation, using a somewhat complex formula. In my case, the bridge amount is actually slightly less than my age-60 CPP retirement pension. A simple phone call to your HR advisor and/or the Superannuation dept should be able to confirm what amount your superannuation will decrease by at age 65. It’s also worthwhile to remember that the OAS will kick in around then also.
As for your CPP amounts, it’s true that the reduction factor is increasing each year until 2016, when it will reach 0.6% per month. This does mean that taking CPP at age 60 will be a better deal for your wife than for yourself, but it still might make sense for both of you. Depending on your entire contributory period, if you’re not working now and if you don’t take your CPP early, your “raw” CPP calculation may be reducing if you delay, which offsets some of the age adjustment factor.
If you want accurate CPP estimates, I can do that for you (for a fee), if you email me at DRpensions@shaw.ca