New CPP rules are here
Canada Pension Plan is one of those things that affect every working Canadian and yet it’s really misunderstood.
I was fortunate to be asked to talk about CPP and the new changes happening in 2012 on CBC Radio across Canada. The first station was in Windsor. I had to get up at 4:30am to start a 4:40 segment. I then travelled (by phone) across Canada to talk to 8 different stations for 5 to 10 minute segments. Thanks to Dagna, Tony Doucette in Windsor, Leigh-Anne Power in Gander, Matt Rainnie in Charlottetown, Terry MacLeod in Winnipeg, Joslyn Oosenburg in Yellowknife, Sandi Coleman in Whitehorse, David Gray in Calgary, Rick Cluff in Vancouver and Terry Seguin in Fredericton for having me on their shows today.
I thought I would share the questions and answers for anyone that might have missed it.
1. What are some of the key changes to CPP this year?
The most positive change is that it’s easier to get more. Contrary to some people’s belief that CPP will not be there in the future, CPP is well funded and has been preparing for the eventuality that the boomers are all going to retire and drain CPP. They’ve been building a surplus since 1996 and now have about $150 billion in assets and still growing. Because of the surplus in CPP, it’s a little easier to qualify for maximum CPP because they can drop out more low-earning years from the calculation. CPP will be there in the future.
Probably the most talked about change is the ability to take CPP early at age 60 without having to stop work. In other words, you can be working at 60 and start early CPP if you want but at a reduced amount. It used to be that in order to collect CPP, you had to STOP WORKING but they’ve eliminated that rule.
As a result, many more Canadians will be eligible to collect CPP early so to deter us all from taking CPP early, they are increasing the reduction for taking it early. The reduction used to be 0.5% for every month prior to your 65th birthday. In other words if you were 60 years of age, 0.5% times 5 years times 12 months equals 30%. At age 60, your CPP income would be 30% lower than your eligible amount at 65. Under the new rules, they are going to increase the reduction from 0.5% to 0.6%. That means instead of a 30% reduction at age 60, the reduction will be 36%.
In addition to trying to deter you from taking CPP at age 60, the new rules want to entice you to take CPP later after age 65. If you decide to take CPP at age 70, they will enhance your CPP by 42%. In other words, they are dangling this carrot at age 70 to see if you will give up income today to get more in the future.
The last change is the requirement to continue paying into CPP if you working. It used to be that if you were collecting CPP, you did not have to pay into CPP again if you started working again. Now, all Canadians that work, have to pay into CPP but all contributions go towards increasing future CPP income. If you work you pay. If you pay, you will benefit.
2. Who should be paying most attention to these changes?
Because of the increased reduction from 0.5% to 0.6%, Canadians who are turning 60 to 64 this year should really pay attention to these changes because they have a big decision to make . . . Should you take CPP early and start your pension whether you are working or not. Because they are phasing in the reduction from 2012 to 2016, waiting to take CPP may result in a bigger reduction.
The longer you wait, the more you will lose so you should really think about taking it early and at least run some calculations.
3. When would it make sense to taking it early or hold off on collecting CPP until age 70?
For me, the decision to take CPP early or leave it later is really about life expectancy and what I call the breakeven point. Generally speaking if you think you are going to live a long life with a longer life expectancy then it may make sense to leave CPP till later. Mathematically the breakeven point is between age 74 and 77. If you can tell me EXACTLY when you are going to die then I can tell you EXACTLY whether you should take CPP early or leave it till later. Here’s the breakeven calculation for 2012:
Related article: Breakeven points for taking CPP early
Generally speaking I think most people should and will choose to take it early but that’s a generalized statement that does not apply to everyone. It’s important that you run some calculations and see what makes best sense for you. Everyone’s situation is different but the math is the math.
4. Overall, are these changes beneficial? (Who wins and who loses out?)
With the new rules, there are both winners and losers.
Obviously one can argue that the people who lose out are the people who were going to retire before the age of 65 and take CPP early anyway. These people will face a bigger reduction under the new rules from 0.5% to 0.6% but at the same time, people who continue working also have the ability to keep paying into CPP to increase the future benefit.
People who were going to continue to work past age 60 now have the opportunity to collect CPP earlier without having to stop work. That opportunity did not exist without having to stop work for 2 months.
5. What should people consider discussing with their financial planner in light of these changes?
CPP, OAS, and pensions are the foundation of retirement income because they have the ideal characteristics of retirement income – it’s guaranteed, consistent, increases every year and paid for life.
I’m always amazed at how many people have no clue how much CPP they are going get in retirement. How can you properly plan for retirement income if you have no clue what you are going to get from CPP? Some people qualify for the maximum benefit of $987 per month. Others get a lot less. The average is about $512 per month. Everyone needs to call Service Canada and get his or her CPP statement of contributions.
Comments
Re: Breakeven point.
If you factored the time-value/opportunity costs of receiving CPP earlier, the breakeven months are lower.
Additionally, you will need to consider the tax bracket of the individual.
Does OAS clawback consider CPP into equation?
I would personally take CPP out as soon as possible. Think of it this way, you will eventually die, so you should try to enjoy your money now, not later or giving it to someone else, unless that’s your intention.
I have applied for CPP so I can receive benefits when I turned 60. Great to wait till your 70 but nothing says I will see 70. My generation is the first ones to pay into CPP and OAS their full life term and I intend to enjoy the benefits tyhat I paid into and not leave it for someone else…my money is better served to me first!
Hi Roger
“but nothing says I will see 70”
Statistically if you’re in good health at age 60 you have a life expectancy of 82.
If you take your CPP at 60 versus 65 the break even point is about age 75. So its much more probable than not that your going to do exactly what you don’t want to do … leave money for others as you’ll still be drawing a reduced CPP after 75.
At age 70 versus 65 the break even is 82. It seems to me 65 is the better choice but of course its a personal decision with many variables. I just don’t want hear people that made the age 60 choice to complain later that they don’t have enough, for example for medications as they get older.
OAS is just welfare. Some get it some don’t.
Great update Jim.
@Richard Rinyai, I totally agree with you.
I’ve got 20+ years of work left before I can take CPP. I plan on taking it as soon as I can. This may sound selfish but I’ve earned it and it’s my money.
@Jim,
At reduced CPP income, I can start drawning down my RRSP as well, in a lower tax-bracket and moving any monies I don’t expense to the TFSA; maximizing tax-free growth.
Again, 20+ years down the road but it’s my thinking today as I strategize for tomorrow.
I am 16 months away from my 60th, so have to start learning about my options pretty soon. Thanks for the information, Jim. I am tempted to take the CPP asap. I am a cancer survivor who doesn’t anticipate longevity. My father passed away at 77, also with cancer. My Investment Planner (met with him recently) suggests that the “break-even” occurs at around 82. That is, someone taking a reduced CPP at 60 will have taken the same amount of $ out of CPP at 82 as someone who waits til 65. (Roughly $205,000) Is this about right? Seeing as I can’t figure I’ll get to 82 :(, I might as well take it at 60.
For those of us who took (or were essentially forced to take) early retirement at 55, the calculation becomes a comparison between the lesser of two penalties; i) not contributing (significantly) to CPP post-55 and being ground by the non-contributory period exceeding the drop out period and ii) the discount for taking CPP pension early.
In my case it meant taking CPP no later than 61.
I am in a similar position, having retired at 56. There is lots of information available to help understand the cost of starting cpp payments early, however I’ve looked but not been able to determine the true financial impact the increased number of non contributory years will have. How did you determine 61 was your time to start cpp payments?
What does it mean with the new rules if you are 60 – collecting CPP and working you have to pay into CPP – BUT the good thing is you will collect more? When can one expect your CPP benefit to increase to make up the difference of paying into it at age 60? I thought the amount was fixed once you start collecting. Also I saw a message on the CRA website saying that you can elect NOT to pay CPP when you turn 65. My husband is self-employed and therefore has to pay double CPP so this was bad news for him. Have you heard about this option.
Mary
You are correct that you will now have to pay CPP contributions if you are 60-65 and still working, even if you are already receiving your CPP retirement benefit. 2012 is the first year that this happens, and your first “post-retirement benefit” (PRB) is supposed to be effective Jan/2013. Realistically, it will probably be June or July 2013 before the government has proof of your 2012 CPP contributions through your tax return, so I woudn’t expect a cheque before then, but it should be retroactive to Jan/13. The same process will occur each subsequent year, with contributions for each calendar year generating a new PRB effective the following January.
From a rough calculation perspective, each year that you earn at the max YMPE (approx $50,000) will generate a PRB of approx $25/mth (reduced by the normal adjustment factor based on your age when the PRB is effective) starting the following year. If you earned 1/2 of that amount, your PRB would be approx $12.50/mth etc.
After age 65, it is optional to contribute to CPP as you indicate.
I think paragraph 2 may mislead some people. By my calculation, the additional benefit from delaying CPP one month is higher than the increased penalty, with the possible exception of January.
Also, the phase-in will be complete by 2016, not five years from now!
Even if you are still working, you are better off taking it at 60 and just putting it all into an RRSP.
The CPP “Drop Out” rate increases to 17% in 2014.
Does that become effective on January 1, 2014? For a person about to apply for CPP should I then wait until 2014 to take advantage of this. I need all the Drop Out I can get.
After thinking about my own question maybe I’m looking at the date relationship wrong.
Since I would be applying to take pension in 2014 then I assume that the new 17% “drop out” rate would apply rather than it have anything to do with the date of application.
Nick
You’re 100% correct that the new 17% dropout rate starts in 2014, and that it is the effective date of the pension that is critical, rather than the date of application.
If you do want your pension to be effective January 2014 however, your application must be received by Service Canada on or before December 31, 2013.
Thanks Doug. I kinda thought that after posting.
Sorry should be .ca not .com
Sorry should be .ca not .com
I beleive i contributed last 10years in cPP but after taht i moved abroad for job as a non resident. Can i still contribute to CPP?
Farrukh
Assuming that you’re still working outside of Canada, there are limited circumstances when you might still be able to contribute to CPP.
Here’s a CRA weblink with the details: http://www.cra-arc.gc.ca/tx/hm/xplnd/mplymnt-eng.html
No one seems to consider the OTHER factors when taking CPP Later.
-Will you get the OAS supplement at 65 if you postpone CPP to 70?
-If you have a younger spouse and you are eligible for an OAS supplement, your younger spouse may get an “Allocation” (Early OAS at 60
-are your GST refunds going to go up if you postpone CPP to 70?
-are you going to pay less into your Provincial Medical plans if you postpone CPP to 70?
The other side of the coin is :
Both my sets of parents and my aunt took their CPP at 60 as they believe the break even point is at 77 years of age and usually you don’t need as much $ at 77 as you may not travel as much or “snowbird” anymore.
InsaneTravel
Dear IT – Those are all good points that you raise!
I have a neurological disease that leaves me with very little speech ability. My brother’s financial planner said I could get money from the government – is this true?
Elaine
You haven’t given much information for a good response, but it’s possible that you could be eligible for a CPP disability pension. You would need to meet the contributory requirements and your disability would have to prevent you from working.
IS it beneficial to opt out of paying into CPP post retirement when i’m only making $600 a month, or continue paying into it?
Julie
CPP contributions on monthly earnings of $600 would cost you approx. $178.20 for the year, and would earn you a PRB of approx. $42.00 per year at age 65. In my mind, that’s a very good return on your investment.
Hi. Does monthly CPP payment depends upon our annual income?.How much a person with annual of $60000 and aperson with annual income of $40000 , will get per month afet retirement at 65 years of age ?
Malik
The amount of your CPP depends on your “average monthly pensionable earnings” from age 18 to 65. Read this article for more details: https://retirehappy.ca/how-to-calculate-your-cpp-retirement-pension/
I started to contribute to CPP at the age of 34. I now plan to retire at 60, which means I would have contributed only 26 years. I also plan to apply for CPP at 65, not at 60. Since I will not be contributing to CPP between the age of 60 and 65, will these 5 years of non contribution reduce my CPP benefit at 65?
Norm
Yes, those last 5 years of zero earnings will reduce your “calculated CPP” at age 65 by approx. 10%. from what it would be at age 60.
Thus your choices will be taking 64% of a certain amount at age 60 (due to the age-adjustment factor), or waiting until age 65 to receive approx. 90% of that same amount (due to your reduced average lifetime earnings by age 65).
Your “breakeven age” for these two choices is approx. age 77.3
Doug
Great explanation…Thanks a lot.
Before I posted my previous question, I phoned My Services Canada but all I got are recorded messages, absolutely no help at all.
I will turn 60 in June this year, and I will be contributing to CPP up to that point. To minimize my taxes, I think I will wait till Jan 2017 for my first CPP payment. In case you have any more insight, I will be glad to hear it.
Norm
Starting your CPP effective Jan 2017 is probably a good strategy from a tax perspective.
If you want to actually receive your first payment in January, I’d recommend applying at least 6 months ahead of then.
Doug, I am 58 and have made the max contribution to CPP for 39 yrs thus qualifying me for max payments. However as I am still working I continue to have CPP deducted even though it will never increase my monthly payment when I am eligible to start collecting. This will work out to over 10K being taken from me that I will never see any additional return on. If you include the employers portion that is over 20k taken ith nothing paid back. Can I do something to stop CPP from being deducted even though I am not 65?
Alden
Sorry, but the short answer is “No”.
I am a healthy 67 year old, I have not yet applied for OAS, or CPP because I heard it would be
to my advantage to wait till age 70 to begin collecting. What is the advantage of waiting till 70 or should I apply now?
Should the new governments tax rules influence my decision? I dont work but collect interest
income. Age 70 it is mandatory to take it anyway right.
Donna
Between age 65 and age 70, CPP increases by 0.7% for every month the you delay in applying, and OAS increases by 0.6% per month for every month that you delay. It’s never mandatory to apply for CPP or OAS at any age, but the increases stop at age 70 so there’s no incentive to delay beyond that age.
If OAS and CPP are delayed till age 70 to start collecting, what age would be the break even
age, taking into account the lost income by delaying till age 70, how much money would I be
ahead if I live till say for example age 82, but dont start collecting till age 70, would I ever catch up
From the 5 years age 65-70 of lost income if I wait to collect.
Donna
For OAS, the breakeven age is 83.9 and for CPP the breakeven age is 81.9. If you died at age 82, you’d be slightly better off taking your OAS at age 65 and it wouldn’t really matter when you took your CPP.
I I’m 59 3 months, iheard that you can recieve CPP before 60 years of age, really need to know quickly, is this true. Worried
CPP retirement pension is payable at age 60, at the earliest.
I am collecting my CPP early when I turned 60 this year 2016. I work for 40 years in Canada so my CPP is $554.00. My question right now I still work full time, but they only give me 28 hours per week for $13.80 per hour rate. I m struggling to pay my mortgage. I already cash my RRSP FOR AMOUNT OF $5,000.00 the bank take 5% I think n end up $4,454.00 I cash again after 3 months to pay more bills n for my monthly mortgage. I still have $10,252.00 left. My question is do you think better that I cash it again before I reach 65 years or I just wait till I turn 65 to cash it. If I still have my RRSP at 65 years can I still get my OLD AGE PENSION.
Remy – Yes, you will still be eligible for OAS at age 65 regardless what you do with your RRSP between now and then.
Thank you,another question about it do you have any idea how much Old age pension I will get is it gonna be the same for everyone or there’s a maxim amount for everyone. This questions is for my friend, he is 63 years old she asking he has $100 thousand RRSP and her question can she get also her Old age Pension? he never apply for CPP. Does he need to cash RRSP before applying for Old Age pension.
Remy – The amount of OAS is based on how many years you have resided in Canada after age 18, with the maximum being $578.53 if you have 40 or more years of such residence. RRSPs don’t affect OAS eligibility at all, except if/when you withdraw them and only then if your income exceeds the OAS clawback threshold (approx. $72,000).
Hi Mr. Doug Runchey, I hopefully you can answer a bit regarding Employment Insurance. Last year I lost Oct. 28, 2015 my full time job. Then I wait for 4 months to get my benefits, after this I got my money from E.I. but I have a part time at that time only 22 hours, that is why they approved me for the benefits for then the company I work a the biggest Retailer open a full time so I got the job. So right away when I file the report on (March 2016) n said warning not to apply for E.I. In this case only used 1 1/2 to collect E.I and I am a Long Term Tenure till Feb. 2017. First the employer gave 37.5 hours per week, then turn to 28 per as a full time now they cut it into 27 hours per week this month of Dec.. My question is Do you think I can still apply for my old E.I. Thank you very much I hope you can still answer my question. Hope to hear from you. Sorry write too long.
Remy – Sorry, but EI is not my area of expertise.
ok thankyou somuch
Took my CPP early at age 60, have max out every year, getting 26.00 Post retirment benifit per month, how I calucate what Will get at age 70 or should I op out of CPP now as I am 66 and paying 200 per month
Hi Brian – To understand the PRB calculation, read this article: https://retirehappy.ca/calculate-cpp-post-retirement-benefit-prb/
If you want me to do the calculations for you (for a fee), email me at [email protected]
Brian,
I opted to take CPP at 60 years old. What I didn’t expect was to see a tax bill of over $1,100 at the end of 2017 for the extra income from CPP.
Can I stop accepting CPP now that I’m 61 and delay the rest of the payments until I turn 65 to try to save on my tax bill?
Hi Kimberley – It’s too bad that you hadn’t realized that CPP was a taxable benefit, but in order to cancel your CPP you would have had to request the cancellation within 6 months of receiving your first payment. Unfortunately, it’s too late now.
Hi Kimberley
What some people do in this situation is use their CPP payments to fund an RRSP (if you have the room). It doesn’t generate a tax refund this way, but it eliminates the need to pay taxes on the CPP amount.
Hi Mr. D. Runchey,
Thank you so much for your reply to all my question
Thanks Doug for the useful information.
Hi Doug,
My question is: In case before I die do I need a letter to give to the Government of Canada the name of my beneficiary or I can do it now.I will be 62 yrs old n I am getting my full amount of CPP when I turned 60. Is CPP transferable for my beneficiary?
Thank you so much.
Remy
Hi Remy – There is no such thing as naming a beneficiary under CPP. If/when you die, your Estate can apply for a one-time death benefit, your surviving spouse or common-law partner )if you have either) can apply for a monthly survivor’s pension and any dependent children (under age 18 or 18-25 and in fulltime school attendance) can apply for a monthly child’s benefit. Aside from those 3 possible benefits, there is nothing under the CPP after your death.
I also received some sound advice from Doug (drpensions) a couple years ago, for a low fee. I highly recommend his advisory services.
If I retire at 60 but chose not to take CPP until 65, will I have a reduction due to not paying into CPP for 5 years? I have maxed my contribution every year for over 25 years.
Hi Don – The short answer is “YES”, because your CPP at age 65 will be based on your best 39 years of earnings.
Thank you for the excellent info. I’m 55 and have contributed 20 years of maximum pensionable earnings. I plan on drawing from the CPP at 70. and contributing the maximum until I’m 65. This will give me 30 maximum years. Can I continue to contribute from 65-70? If I do, what impact would this have on my CPP payout?
Hi Kate – Yes, you can definitely continue contributing from age 65 to 70. In fact, you must continue contributing if you’re still working after age 65 unless you are receiving your CPP. These extra 5 years of contributions could increase your CPP at age 70 quite a bit, or very little, depending on your lifetime record of earnings and whether or not you qualify for the child-rearing. Email me at [email protected] if you want me to calculate the effect for you (for a fee).
Hi
if am 65 and I am making 90000 a yera and planning to work for 5 more years
should I apply for CPP and Old Age
please give some idea
does it help maximixing my RRSP
thanks in advance
Hi Humberto – You definitely shouldn’t apply for your OAS now, because you’d lose most of it to the OAS clawback and regular income taxes. You probably shouldn’t apply for the CPP either, unless you have a really good indexed DB pension plan that will cover most of your retirement income needs and wants.
Retiring at 55: – taking CPP at 60 vs 70
Would the 42% enhancement of CPP @ 70 negate completely the non-contributory years from age 55? How do we figure this out? We’d be in a financial position to not NEED CPP at 60.
Hi Debbie – There isn’t a simple formula that I can give to you, because it would vary based on the 37-year contributory period from age 18 to age 55. If you want me to do those two calculations for you for a fee of $50 plus GST, email me at [email protected]
Hi,
I’m currently 67, and am not receiving cpp. I’m still working. My pensionable earnings come from my corporation, so I can control the amounts of those earnings. With the rule changes in 2019, was wondering if there is a formula for estimating dollars contributed between 65 and 70, and payout later. Thank you
Hi Mel – There is no simple formula, because the payback would depend on your lifetime record of earnings. I can calculate this for you on a year-by-year basis (for a fee) if you email me at [email protected]