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’s situation

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

Time Is MoneyBecause 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.

If you want any help with these calculations (for a fee), you can email me at [email protected]

Written by Doug Runchey

Doug Runchey worked for the Income Security Programs branch of Human Resources and Skills Development Canada for more than 32 years, and was a specialist in the Canada Pension Plan and Old Age Security legislation, regulations and policy areas. He now runs his own company, DR Pensions Consulting, which provides pension advice, including detailed calculations for CPP retirement planning and “credit splitting” purposes. Doug can be reached by email @ [email protected] or check out his website at http://www.drpensions.ca/.

3 Responses to When is the best month to start CPP?

  1. Always interesting to read advice from people in the “know”
    I have herd that there is a grace period for those retireing over the next several years where the rate deduction for early retirment remains at 0.05% per month. As an example, if you were 61 in 2012 your monthly early retirment “penalty” would remain at 0.05% until you were 65. So Sandra should fall within those guidelines and only be penalized at the former rate of 0.05% and not 0.058%.
    This was so that those who were eligilble for early retirement (60 & over) under the old rate would not have a penalty slapped on them for waiting, working longer.
    Correct me if I am wrong.

  2. I’ll correct you.

    What follows is an excerpt from the CPP website

    Taking your pension before age 65

    From 2012 to 2016, the Government of Canada is gradually changing the early pension reduction from 0.5% to 0.6% for each month you receive it before age 65. This means that by 2016, an individual who starts receiving their CPP retirement pension at the age of 60 will receive 36% less than if they had taken it at 65.

    The following table shows the percentage by which your retirement pension will decrease for each month that you receive your pension before age 65. These amounts will change every year until 2016.

    For example, if you begin receiving your retirement pension in 2013, it will be reduced by 0.54% for each month that you receive your pension before age 65.

    Year of retirement

    % (monthly reduction)

    2012 0.52
    2013 0.54
    2014 0.56
    2015 0.58
    2016 0.60

  3. Thanks for the reply Dave.
    I dug a bit further and found this

    “Individuals born before 1 January 1954 are not affected by this change. If you are under age 65, your pension will be reduced by an adjustment factor of 0,5% for each month preceding your 65th birthday.

    If you were born in 1954 or later and you apply for your pension before age 65, the adjustment factor varies depending on the amount of the retirement pension. The table below gives the applicable adjustment factors.”

    Mind you, I did find this on the QPP(RRQ) site and not the CPP site as I live in Quebec. So it basically states that those born before 1954 will retain the 0.05% per month penalty for pre-retirement.
    Usually the QPP mirrors the CPP but maybe, in this case, there is some benefit for those living in Quebec

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