I’m often asked when to apply for CPP as there is a lot of confusion as to the best time. If you’ve contributed to CPP you should expect to receive the benefits. But as CPP benefits have financial-planning implications, even wealthy individuals who have contributed to the program throughout their working lives need to understand what these are. So one of the hardest questions from clients we have to answer is:
“When should I apply for my pension?” Your individual CPP retirement benefit is based on your average earnings during your working years and the age at which you apply to start receiving benefits. You can get a statement estimating your CPP retirement value based on a starting age of 65 on their website:
If you haven’t previously registered yourself, don’t expect to access your information for several days!
Under the new rules, after 2016, if you choose to take CPP early, your pension payment will be reduced by 0.6% for each month you are under age 65. If you wait until after age 65, your monthly pension payment will be increased by 0.7% for each month you are over age 65 up to age 70.
The changes will provide an incentive to apply for retirement benefits after age 65. From a purely financial standpoint, people who live beyond age 80 will be better off if they had postponed their CPP application to age 70. But is this really the best choice?
You have options. For those fortunate to have several different sources of income to fund their retirement, this provides them with the luxury of choosing the optimal time to apply for their CPP benefits. It also presents some tax-planning opportunities.
For example, if you turned age 65 in 2012, the maximum CPP retirement benefit at this time was $11,840 per year. This may seem like a drop in the bucket, but with Canada’s graduated tax system, each drop can make a difference come tax time. Delaying application for CPP retirement benefits could present an opportunity to reduce one’s risk of OAS claw back, especially if you expect to be in a lower tax bracket later in life. OAS starts to be clawed back at $70,954 of net income, and is fully clawed back at $114,600 or more net income, which explains why this happens when people sell a farm or business.
Further, the increased monthly payout as a result of delaying could mean an extra 42% CPP benefit. Just don’t wait too long, as applications after age 70 provide no additional benefit. The reality is, as a result of taxable investment income, you will likely remain at the highest marginal tax rate throughout retirement.
Once the Federal Government’s changes are in place by 2016, applying for CPP at age 60 will mean a 36% reduction in the monthly retirement payments. In today’s dollars, assuming 100% eligibility for benefits, the annual pension payment would fall to $7,578. A wealthy individual in the highest marginal tax bracket could invest this income, and with a rate of return of 4% before tax, it would take close to 15 years to break even, compared to waiting and taking CPP at age 65.
So as with all programs the Federal Government implements, they are never simple, and it’s easy for the average Canadian to get confused. So take the time to sit down with a trusted financial advisor and work out what’s best for you and your family.
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