The main purpose of the Canada Pension Plan (CPP) is to provide a base replacement of earnings for retirees. Following a review in 2009, several changes were made to the program. The CPP operates throughout Canada, except in Quebec, where the Quebec Pension Plan (QPP) provides benefits. The changes detailed below apply to CPP only and will be implemented gradually beginning in 2011 with full implementation in 2016. While these changes do not apply to the QPP, the Quebec Budget released in March 2011 has proposed similar changes to the calculation of benefit payments that will be phased in over a three year period.
Many people wonder whether they should take CPP early, wait until they reach 65 to receive the full amount, or delay payments until they are 70. With this in mind, this article will review the CPP program and will look at the early receipt of CPP benefits as a retirement planning strategy. It will also explain the benefit changes to CPP that will be implemented over the next six years.
How are CPP benefits calculated?
The amount of your CPP entitlement will depend on how many years you have contributed to the plan, the amount of your contributions and the age at which you start receiving your pension.
Most contributors are also entitled to a “general drop-out provision”, which allows them to exclude a portion of their zero or low earnings years from the calculation of their retirement. Beginning in 2012 and with full implementation by 2014, the number of years of low or zero earnings that are automatically dropped from the calculation of CPP pensions will increase to exclude up to eight years of low earnings under the general drop-out provision.
When can CPP payments start?
CPP payments can start being paid as early as the month after your 60th birthday and as late as age 70. Under the current rules, if you apply to begin receiving pension payments before age 65, payments will start the month after you stop working or when you earn less than the allowable maximum pension payment ($960.00 monthly in 2011) for two consecutive months. Beginning in 2012, you will no longer need to prove that you have stopped working in order to begin receiving CPP pension.
The new Post-Retirement Benefit (PRB)
Also beginning in 2012, if you continue to work after you begin to receive CPP pension benefits, you will be able to continue to make CPP contributions that will increase your monthly payments through the Post-Retirement Benefit (PRB).
The PRB will be added to your CPP retirement pension even if the maximum pension amount is already being received.
The following guidelines apply to the PRB:
- If you are under age 65, contributions will be mandatory for you and your employer.
- If you are age 65 to 70, contributions will be voluntary (your employers will have to contribute if you do).
- Individuals between the ages of 60 and 70 who make these contributions may begin to receive the PRB the following year.
- Self-employed contributors will be required to contribute both the employee and employer portions.
How much do the CPP payments decrease if taken early?
In 2011, the maximum CPP benefit is $11,520.00 a year. Under the current rules, if you start collecting benefits early, the CPP entitlement is reduced by one half a percent (6% a year) for each month collected before your 65th birthday. If you start to receive CPP at age 60, the maximum CPP entitlement would be 70% the normal entitlement.
Once the new changes have been fully implemented in 2016, the amount by which your early pension will be reduced will increase from the current 0.5% per month (6% per year) to 0.6% per month (7.2% per year). This means that if you are age 60 in 2012 and you apply for CPP benefits your pension amount will be 36% less than if taken at age 65, or 64% of the normal entitlement.
As mentioned above, this change will be implemented gradually from 2012 to 2012. Below is a table that shows the change to the calculation each year until full implementation.
% Monthly Decrease
How much do the CPP payments increase if delayed?
Prior to 2011, if you waited until age 70 to have CPP payments begin, for every month delayed after your 65th birthday the payments would increase by one half a percent (6% per year). So if you were age 70 in 2010 and applied for benefits, your CPP entitlement would be 130% of the normal entitlement.
From 2011 to 2013, the calculation of the increase in benefits for applications after age 65 will gradually increase from 0.5% per month (6% per year) to 0.7% per month (8.4% per year). This means that in 2013, if you start receiving your CPP pension at age 70, your pension entitlement will be 42% more than if taken at age 65, or 142% of the normal entitlement.
Below is a summary of the changes to the calculation of monthly benefits, along with planned implementation dates.
% Monthly Increase
What is the best strategy – early payments or delayed payments?
In certain situations, it may be beneficial for CPP payments to be taken early. It makes sense to do this for several reasons:
- CPP will supplement your income which allows your other retirement assets to continue to grow. To the extent these assets are registered, they continue to accumulate tax-free.
- CPP has limited estate benefits (currently a flat payment of $2,500.00)
- CPP provides no capital value to your estate.
Consideration should also be given to your health and life expectancy. If you expect to have a shortened life expectancy (due to a terminal illness or an inherited disease), it would be to your advantage to receive the CPP benefit as soon as possible.
Another consideration is the amount of other investment assets that are available to produce income. If you do not have sufficient income/cash flow to meet retirement expenses than the early receipt of CPP benefits would be to your advantage.
The following table illustrates the annual CPP payments if taken at age 60, 65 and 70 based on the new rules that will be fully implemented in 2016. For simplicity, the amounts are based on the 2011maximum CPP entitlements of $11,520.00
|Start at age 60|
|Total payments received||Start at age 65|
|Total Payments Received||Start at age 70|
|Total Payments Received|
Referring to the table above, under the new calculations, the breakeven age is around 73 if CPP payments are started at age 60. The breakeven age is much later if benefits are delayed to age 70. One very important point to remember is that by receiving CPP payments early, other assets (registered and non-registered) will not be utilized to the extent they would have been if the CPP payments were taken at a later age. This will allow the registered assets to grow tax-sheltered and the non-registered assets to grow by the after-tax returns.
Beginning in January 2011, changes are being implemented to CPP benefits which will be phased in over a six year period with full implementation in 2016. If you have not already applied for CPP retirement pension benefits, the changes may affect how and when you choose to retire from work and when you decide to apply for benefits. You will not be affected by these changes if you start receiving a CPP retirement pension before December 31, 2010 and you remain out of the work force.
Early receipt of CPP payments is beneficial due to the fact that investment assets (registered and non-registered) will not be reduced to the extent that they would be if CPP payments were delayed. The health status and life expectancy of the individual contributor would be an issue to consider. Another consideration would be the amount of income produced by the investment assets to fund retirement expenses.
CPP sharing is an effective tax strategy for spouses who are in different tax brackets. Tax savings can be accomplished by sharing retirement income with the spouse in the lower tax bracket.
Sharing CPP Benefits with a Spouse
Many people are not aware that spouses (or partners) can share CPP retirement payments if both are 60 years of age or older. This article will explain how CPP sharing can be an effective tax strategy for your retirement plan.
What does “CPP Sharing” mean?
Married or common-law partners who are together (not separated or divorced) and who receive CPP retirement pensions can share their pension benefits on the portion of the benefit earned during their time together. As this is a form of income splitting, this may offer some tax savings if the individuals are in different tax brackets. If only one of the spouse/partners is a CPP contributor, they still have the opportunity to share their pension. The overall benefits paid do not increase or decrease with CPP sharing.
What are the advantages of “CPP Sharing”?
CPP Sharing can be advantageous from a tax perspective if one spouse has a much lower retirement income than the other. For example, suppose one of the spouses/partners qualifies for the maximum CPP benefit and the other has a retirement income of $80,000.00 a year. They will be required to pay tax on the CPP payments at their marginal tax rate, which will be approximately 43% (depending on the province of residence). If the other spouse/partner had only worked sporadically and has no other income, the first spouse/partner could direct up to 50% of their CPP payment to the other spouse/partner and realize significant tax savings.
What are the eligibility requirements and application procedures?
To qualify for CPP Sharing, at least one of the spouses/partners must be a CPP contributor. Both spouses must be at least 60 years old and already receiving (or applied for) a CPP retirement pension to quality. The pension sharing arrangements cannot be backdated.
To apply for sharing of CPP retirement benefits, both spouses need to apply to Service Canada. Forms are available online. You will need to provide your social insurance number and original marriage certificate or proof of common-law relationship.
When does the “CPP Sharing” end?
The CPP sharing arrangement will end if the spouses separate (for at least 1 year) or divorce, or if one of the spouses dies. If the common-law relationship ends or if either partner dies, the CPP sharing arrangement ceases. The CPP sharing will also end if both spouses/partners request that it be cancelled. Service Canada must be notified if any of these situations occur.
CPP Sharing is an effective tax strategy for spouses who are in different tax brackets. Tax savings can be accomplished by sharing retirement income with the spouse in the lower tax bracket. If you would like more information on how CPP benefits are calculated and recent changes to the program, please contact The Leslie Group at (416)-510-8966.
This article was prepared and edited for content from a series of articles and information from the CPP Website in 2011.