When is the best month to start CPP?
One of my recent clients was planning to retire in December 2014, and she wanted to apply for her CPP to start the following month. She asked me to calculate what her CPP retirement pension would be effective January 2015, because she knew that the estimate on her statement of contributions (SOC) from Service Canada didn’t include credit for the child-rearing provision.
Related article: Understanding your CPP statement of contributions
What seemed like a simple calculation turned into an eye-opener for her because of the best month to start CPP. I felt her situation warranted being shared.
Sandra was born in May 1952. She started working at age 18, right out of high school. She worked full-time for about 10 years, earning at or near the Year’s Maximum Pensionable Earnings (YMPE) level in most of those years. She then took about 10 years off work while she stayed home to raise three children. She then returned to work, part-time at first and then full-time for the last 15 years or so.
Her SOC estimated that she would be eligible to a retirement pension of approximately $716.28 if it started next month, or $872.66 at age 65.
The impact of the child-rearing provision
Because Sandra’s earnings when her children were under age seven were lower than her “average lifetime earnings,” she was able to drop out almost 12 years under the child-rearing provision of the CPP.
Related article: How to calculate your CPP retirement pension
The impact of the child-rearing provision meant that her actual choices were to receive a pension of $824.41 next month or $1,004.40 at age 65, compared to the SOC estimates mentioned above.
Since she was planning to work until the end of December 2014 though, she felt that starting her CPP effective January 2015 would be the best choice for her. This is where she got the real eye-opener.
The impact of the age-adjustment factor
Sandra knew that there would be a reduction in her pension if she started to receive it earlier than age 65, but she wasn’t fully aware that this “age-adjustment factor” was increasing each year, until 2016 when it will reach 0.60% per month. For pensions starting in 2014 this factor is 0.56% and for pensions starting in 2015 it will be 0.58%.
Based on Sandra’s date of birth (May 1952), if she starts her CPP retirement pension in January 2015, it will be reduced by 16.82% (29 months x 0.58%). On the other hand, if she started it in December 2014, it would be reduced by only 16.8% (30 months x 0.56%).
The result is that her monthly CPP retirement pension would be 20 cents more if she started it in December 2014 at $830.82 instead of January 2015 at $830.62. The real impact though is that she would have an extra $830.82 in her pocket for the December payment.
It gets even better though, in that if she starts her CPP in December 2014, her pro-rated earnings for December will earn her a post-retirement benefit of approximately $1.80 per month effective January 2015.
This means that if she starts her CPP in December 2014 rather than January 2015, she is ahead by $830.82, plus $2.00 per month for life. Not a lot perhaps, but in my opinion it’s better than being behind by $830.82 and $2.00 per month.
Does this situation apply to everyone who starts their CPP in January 2015?
The increasing age-adjustment factor from 2014 to 2015 applies only if you are starting your CPP earlier than age 65. If you are, I strongly suggest that you do the calculations to determine whether you might be better off to start your CPP retirement pension in December 2014 instead of waiting until January 2015.