I did some calculations for a client recently to help her decide when to take her Canada Pension Plan (CPP) retirement pension. She decided to take her pension now, but the amount showing in the letter she received from Service Canada wasn’t what she expected.
Mary (not her real name) was born in July 1954. She had relatively low earnings until age 28 and then earnings above the YMPE (Year’s Maximum Pensionable Earnings) level ever since. She had been planning to retire next year when she turned 61 and was wondering whether she should take her CPP now at age 60, next year when she retires, or at age 65.
Related article: Should you take CPP early?
Based at least partly on my calculations, Mary decided to take her pension now, at age 60. However, when she received her award letter from CPP, she was surprised to find that it showed an amount less than I had said she would be entitled to.
I reminded her that my calculations included credit for her 2014 earnings, and that she should receive a retroactive adjustment to her CPP once Service Canada has confirmation of those earnings when she submits her income tax.
I realized that she was going to have several adjustments made to her CPP next year and such adjustments are not always well explained by Service Canada. These same adjustments will be made for most people who are still working in the year that they start receiving their CPP, so I thought this issue might be a good subject for this month’s article.
I told Mary that she should have three adjustments made to CPP in 2015, which should occur in the following order:
1) Annual cost of living adjustment
In January 2015, her CPP should increase from her 2014 amount based on any increase in the cost of living as measured by the CPI (consumer price index). Based on recent years, this increase will likely be in the range of 1 to 2%. This annual cost-of-living adjustment will be made to her CPP every January.
Mary will be eligible for the full annual increase for 2015, even though her CPP only started in August 2014.
2) Post-retirement benefit increase
Since Mary’s CPP was effective August 2014, and since her 2014 earnings exceeded the YMPE, her prorated earnings from January to July will be used to calculate her regular CPP retirement pension, and her prorated earnings from August to December will be used to earn her an additional PRB. This PRB will be effective January 2015, but she shouldn’t expect to receive it until sometime between April and June 2015, with retroactivity to January.
Related article: Understanding the CPP Post Retirement Benefit
A similar PRB adjustment will be made for her in 2016 (based on her 2015 earnings) and in any subsequent years that she has earnings from salary or self-employment and makes a CPP contribution on those earnings.
3) Increase for 2014 earnings prior to CPP
When Mary’s CPP was first approved, the award letter explained that it was an “interim” calculation which may not include all of her earnings. This is because her 2014 earnings details won’t be available to Service Canada until after her 2014 income tax return is filed and assessed by Canada Revenue, sometime in 2015.
This adjustment should likely happen sometime between September and November 2015, with full retroactivity to August 2014. Sometimes however, Service Canada seems to “forget” to make this adjustment without a reminder telephone call.
Related article: Are you receiving as much CPP as you should be?
At a minimum, CPP pensions will be adjusted at least once a year. The letter from Service Canada (if any) doesn’t always do a good job of explaining the reason for the adjustments made to CPP.
Hopefully this article will help explain the reasons for and the timing of possible adjustments, but fire away if you have any questions!