# Two conundrums of Canada Pension Plan

Janet is turning 60 and is wondering about the two basic conundrums of Canada Pension Plan (CPP). First, she would like to know if she should consider taking CPP early and secondly, if she should she split her CPP with her 67-year-old husband Will. Her first instinct is to wait to take CPP because unlike her husband, she does not have a pension plan. While she does not need much income while Will is still alive, she feels she needs more income when Will passes away because his pension will drop 40% when he passes away.

## Taking CPP early

Canada Pension Plan is normally taken at age 65. That being said, Janet can take CPP as early as age 60 and as late as age 70. To evaluate this lets introduce you to Janet’s twin sister Beth. 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 CPP benefits, Beth can take CPP at age 60 based on a reduction factor of 0.5% for each month prior to her 65th birthday. Thus Beth’s CPP 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.

From a lifestyle perspective, it can be argued that Beth is more likely to enjoy the cashflow from age 60 to 77 a lot more than Janet will enjoy the extra cashflow after the age of 77.

This example is very simplistic. It does not take into account taxes, investment returns or indexing of benefits. Regardless, taking CPP early is simply about getting more money sooner. Waiting just means you have to live longer to make up the lost income.

## CPP Sharing

After debating taking CPP early, the next step for Janet is to figure out if she should split her CPP benefits with her husband. Let’s assume Janet takes CPP early and gets the \$351 per month. Her total income is quite low and she only pays tax at the 25% marginal tax rate. Will on the other hand, makes \$800 per month in CPP and his total income is much higher in the 36% Marginal Tax bracket with \$50,000 of annual retirement income. As a result of the sharing, Will’s CPP amount will drop from \$800 per month to 575 per month. Janet’s income will increase from \$251 per month to \$575 per month. The outcome is \$225 per month of income will move from being taxed at 32% to being taxed only at 25%

The key to determining if CPP sharing is feasible is to look at whether the higher CPP earner is in a higher marginal tax rate than the lower CPP earner. Remember, it’s not just about the higher income earner making more money but rather whether they are in a higher tax bracket.

CPP remains one of the cornerstones of creating retirement income. Planning ahead will help you to know when to take CPP and whether to split benefits with a spouse are key issues.

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### Written by Jim Yih

Jim Yih is a Fee Only Advisor, Best Selling Author, and Financial Speaker on wealth, retirement and personal finance. Currently, Jim specializes in putting Financial Education programs into the workplace.For more information you can follow him on Twitter @JimYih or visit his other websites Group Benefits Online and Advisor Think Box.

### 17 Responses to Two conundrums of Canada Pension Plan

1. Barry says:

Hello Jim,
I am will be 60 in 2011, and currently working full time. I am collecting survivor benefits from CPP, gross \$417 monthly. As I understand, if I take CPP early at age 60, I would be no worse off, as I believe the survivor benefit would be added to the (reduced) 70% of CPP I would be entitled to. That said, I would still hit the maximum CPP. Is my understanding correct?
Thank you.
Barry

• Jim Yih says:

If I understand correctly, yes. My understanding is that your CPP plus the survivors benefit cannot exceed the maximum. I would encourage you to verify this with Service Canada.
Jim

• Doug says:

Barry
The calculation of a combined CPP survivor/retirement benefit can be quite complex. Did you ever get the information you needed to make this decision, or do you still want some calculations done?

2. arolf says:

i was away for 7 years, i just moved back to canada last week, am i eligible to apply for cpp. i worked here for 19 years.

• Doug says:

Arolf
Your temporary absence from Canada would have no impact on your eligibility for a CPP retirement benefit. You are eligible if you are age 60 or older, and have made at least one contribution to CPP.

3. Laurie says:

Dear Jim :

I would like to know how much is the surviours benefit and in order to qualify early pention what is the lenght of the early pention do they take from the year or the term of the pention.

I am very upset because l have to eye injections that are costing \$ 300.00 per injection is there a coverage that l can get to fill out l am 63 and after 65 l don’t have to pay

can you help me please

Laurie

• Jim Yih says:

Have you tried calling Service Canada? I really think that is your best bet for this kind of information. Toll-Free: 1-800-277-9914

Sorry to hear about the eye injections. Coverage for the eye injections depends on the province you are in and the level of health care coverage you have.

Good luck

4. Doug says:

Jim
Here’s another conundrum regarding CPP benefits!

I’m writing to warn yourself and your readers, about a CPP issue that has affected me and affects about 4,000 other divorced/separated male contributors each year. The issue is how the Division of Unadjusted Pensionable Earnings (DUPE aka Credit Split) functions when there were children involved in the relationship.
The DUPE equally shares the CPP earnings (UPE), but does nothing to acknowledge the value of what is known as the Child Rearing Dropout (CRDO). The net result in my case is that my CPP retirement pension estimate at age 65 decreased by about \$190/mthly as a result of an 18-year DUPE, whereas my ex-wife’s CPP retirement calculation only increased by about \$70/mthly. The reason is that she is able to drop out about 10.5 years under the CRDO provision if those years are less than her “average lifetime earnings”, which is the case for her both before and after the DUPE. I, on the other hand, am stuck with 1/2 max earnings for the 18-year period, only 7-8 of which I can drop out under the general 15-17% dropout provision.
I am currently appealing this situation at the Federal Court level, and would be glad to hear from others that are affected by this situation.

5. William Lennard says:

I believe that CPP pension income is NOT eligible for pension income splitting between spouses, according to CRA rules. Please advise.

6. Hi …I appreciate the information, and am trying to follow the date of the article closely, to decide if taking the earlier or later CPP benefit … I don’t know enough to decide if the rules have already changed or will change soon … the article still shows up well in searches so maybe the other Jim will want to keep the update current … Thanks … Jim

7. Domsmum13 says:

My aunt, who is 60, was laid off from a factory job over 3 years ago. She and my uncle, who is 58, live off of his ODSP income, which he has had for many years. Within the last 18 months he has been diagnosed with early onset Alzheimer’s and is not able to be alone for more than 2 hrs at a time. They own their home, but still carry a mortgage. Their mortgage and utilities total \$650/month. Our concern is what will happen to my aunt if my uncle requires long term care before she turns 65 and is able to collect her CPP and OAS benefits. If his income goes to the long term care home and my aunt takes her CPP early, what happens if she can`t cover basic shelter expenses with the CPP payment? Is there help for her somewhere?

8. Daisee says:

Donsmum13 I hope you get an answer soon.
I have a survivors pension and applied for early CPP, which was okayed. I see the month after my 60th b-day what was deposited is exactly the same. Should it not have been mailed to me what to expect?

9. Mark M says:

It’s an abomination the way Canada’s seniors and retirees are treated by our government. We pay into a plan that is mandatory our whole life to be eligible for a maximum of \$980.00? What is that? And better yet, if we keep working, our pensions are deducted dollar for dollar. I know I’m wasting my time expressing this concern. However, I feel better that I did. Thank God for the employers still willing to pay cash under the table. As we certainly won’t be looked after by our government. Oh, and, why do government officials receive nice fat life pensions for only a few years (if that) service? Whatever!

• Doug says:

Mark
Assuming that you’re talking about CPP, we are now contributing 4.95% of our employment earnings annually, and each year of contributions is worth about 0.625% towards our future CPP retirement pension. Not a bad return in my mind, especially when you consider that it also includes protection in the event of disability and/or death.
I haven’t got a clue what you’re talking about when you say that our pensions are deducted dollar for dollar if you continue working??? CPP benefits are taxable, but there is no reduction based on subsequent earnings. What are you smoking?

10. Deb Smith says:

My husband died in Nov. 2011 and I am going to begin CPP at age 60 in 3 months. If I earned more than my husband, would pension splitting benefit me as he is obviously not going to be receiving CPP due to his death? We divorced in 2006.

11. Doug says:

Deb
If you earned more than your ex-husband for most of your marriage, not only would credit splitting not benefit you, it might reduce your CPP retirement pension.
The only way to know for sure would be to do compare your CPP benefit calculation now, to what it would be after a credit split. To do that accurately, you would need your CPP statement of contributions, as well as your ex-husband’s (or a very good estimate of his year-by-year earnings) at least for the period of time that you lived together.
So, if you feel comfortable that you generally had more earnings than him, do nothing!
The only other issue would be if he had another common-law or legal spouse after your divorce. In that situation, that person could apply for a credit split on behalf of his estate, as it might increase the amount of any death or survivor’s benefit.

12. Nick says:

My wife and I both turn 60 next year and are trying to come to a decision on whether to apply for CP now or wait until we are 65. I am already retired and my wife will retire next year. We think we will be able to manage initially without the CP using my wife’s employer pension plan and our RSP savings.

One of my questions is regarding the CPP benefit calculation and low income years used. I understand that a number of low income years are ignored to determine the CPP benefit. If we decide to wait until age 65 to collect CPP will the 5 years of zero income between age 60 and 65 be included in the benefit calculation? Is this something that should help determining whether to take CPP at 60 or not enough to worry about?

Thanks

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