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When Should You Start Your Canada Pension Plan (CPP)

A common question to financial planners is, “When should I  start  taking my Canada Pension Plan?”  The answer is, “It depends,” and you need an reliable fortune teller to get the right answer.

Canada Pension Plan legislation currently allows you to draw your CPP starting at age 60, and also permits you to wait until age 70. Of course, if you take it early, you will receive a lower payment each month for the rest of your life. For each month prior to your 65th birthday that you start your CPP, you receive 0.6% per month less than at age 65. For each month after your 65th birthday that you wait, your CPP will increase by 0.7% per month. At age 60, you would receive 64% of your age 65 payment, whereas at age 70, you would receive 142% of that amount. Putting this into dollars, if your age 65 payment is $1,000 per month, it can range from $640- $1,420 per month depending on when you start between age 60 and 70.  The amount of your pension will depend on how long you worked and that your salary over the years.  The maximum payment to Canadians in 2020 at age 65 is approximately $1,175 ($14,110 annually), while the average person receives about $8,500 per year.

There are a number of considerations to reach your decision on when to start – some favour starting early, while others would make it better to wait.

The most important factor is that your life expectancy. A shorter life expectancy means you should take your CPP early. For obvious reasons, particularly if you have no spouse who will receive your survivor benefit, you should take your CPP at age 60 if you do not expect to live until age 65. Based purely on life expectancy for a single person, the following a table would be a guide on when to draw the pension in order to receive the highest amount of money. This calculation is looking only at the amount of money that you will receive and not how you spend it or invest it.

Life Expectancy Start at Age Life Expectancy Start at Age
68 or younger 60 79 66
69/70 61 80 67
71/72 62 81/82 68
73/74 63 83/84 69
75/76 64 85 or older 70
77/78 65

Let’s look at an example. If you are entitled to a pension of $1,000 per month at age 65, and the start drawing it at age 60, you will receive $640 per month. Now, assume that I am entitled to the same pension, but I wait until age 65. By the time you reach age 65, you will have received a $38,400 (60 months at $640) in CPP, and I will have received nothing. However, from that time forward, you will continue to receive $640 per month while I will start receiving $1,000 per month. By the time we both reach our 74th birthday, you will have received $107,520 (14 years x 12 months x $640/month) and I will have received $108,000 (9 years x 12 months x $1,000. After age 74, I will have received more money than you. Therefore, if your life expectancy is age 74 or longer, it may make sense to start your pension later than age 60.

Of course, if you are not spending your money, and are a brilliant investor, maybe you can invest your $640 a month and grow it by a huge rate of return, giving you an equivalent or higher amount than I will obtain on my $1,000 per month starting five years later.  Good luck with that, and send me the name of your broker.

However, other factors may play an important role in your decision making.  I provide an overview of some issues below that may impact your decision. Everyone’s circumstances differ, and you may wish to seek professional advice on what is best for you. If you have a crystal ball, it would be a great asset, because this CPP decision is impossible to make with any accuracy.

Considerations for taking CPP early

  1. Short life expectancy
    This impact was discussed above, and is perhaps the most important of all. If you are entitled to a survivor’s benefit, the life expectancy of your spouse or common-law partner is also a factor. The survivor’s benefit issue is discussed further below.
  2. Need for cash
    If you are behind in your bills and you need cash to satisfy your creditors, taking your CPP early to catch up on your arrears may be a wise choice. You should work with a financial counsellor to assist you with this decision and your budgeting.
  3. More cash to enjoy life while you can
    You may have enough income now to meet all of your necessary expenses, but not enough for entertainment, travel, etc. You may want more money to enjoy life while you are physically able to do so. Using this rationale, one individual told me she reduced her work week from full-time to part-time and applied for her CPP. This gave her the same cash flow as working full-time, but she now had more time to enjoy life and the same level of income.
  4. Minimal or no entitlement to survivor’s CPP benefit
    The CPP “may” pay a survivor’s pension to your spouse or common-law partner after you die. However, the maximum CPP that any one person can receive in retirement is one full retirement pension. If that spouse is already entitled to a full retirement pension, he or she will not be entitled to any of your survivor’s pension when you die. If he or she receives something less than a full retirement pension, a survivor benefit will be paid. The size of this pension will depend on how much his or her retirement pension is below the maximum. In addition, if you have no spouse, no survivor’s pension will be paid (unless there are qualifying dependent children). For example, if you are single, and die before you start collecting your CPP pension, your estate will receive nothing other than payment of a taxable death benefit, which is currently a maximum of $2,500.  Likewise for a married person whose spouse receives a maximum pension already.  What a waste of a lifetime of paying premiums, for which policy I think the Government of Canada should be ashamed! I know of no other defined benefit (i.e., lifetime) pension plan by any government or private company that does not pay out at least the members’ premiums upon death.  Until recent years, the maximum employee premium for CPP approximated $2,500, which has increased over the years for increases in wage rates.  Using that figure for a working life of, say, 40 years, the employees contributions would be $100,000 in today’s dollars, with a matching amount by the employer.  And if you die as a single person before you collect, it is all gone except for what is left from the $2,500 death benefit after taxes are paid.  We should all be entitled at least to a refund of our premiums plus interest, just like the provisions set out in government employee pensions.  (Sorry for the ramble – this upsets me because it is a well-kept secret.)
  5. Impact of Old Age Security Clawback or Guaranteed Income Supplement (GIS) reduction
    After reaching age 65, all Canadians are entitled to Old Age Security (if they have lived in Canada for 10 years or longer). However, if your income exceeds a certain threshold, which for 2020 is $79,054, you must repay your OAS at the rate of $0.15 for each dollar over this amount. If your net income after age 65 will exceed the threshold at that time, taking CPP early will give you a smaller annual CPP pension, but result in less repayment of OAS. This factor alone may not be enough to alter your decision, but in conjunction with other factors, may do so.  At the other end of the income spectrum, low income individuals who will be entitled to the Guaranteed Income Supplement will have their GIS reduced by about 50 cents for every dollar of increase in their income.  For a single person age 65 or over in 2020, they may be entitled to GIS if they make less than approximately $18,600 (before counting their Old Age Security).  For couples, the threshold is about $24,600.  This may be an encouragement to take CPP early so that GIS will be higher.  Such low income folks may also have a need for more cash regardless of other considerations.

Considerations for deferring your CPP

  1. Average or longer life expectancy
    This impact was discussed above, including the life expectancy of your spouse or common-law partner, and, again, is perhaps the most important issue to consider.
  2. A decrease in your tax bracket in retirement
    By taking CPP early, you receive less monthly pension. However, if you are also in a higher tax bracket now then you will be in the future, you will also be paying more tax on your CPP then you would in the future. This is a typical situation if you draw CPP while you continue to work. For example, in 2020, a Prince Edward Island taxpayer pays approximately 37% on income between $48,000 and $97,000. A person with income of between $13,000 and $48,000 would be paying tax of approximately 27%. If you are currently making over $48,000 but would be making less than that amount when you retire, you would be paying an extra 10% tax on your CPP while you are still working.
  3. Possibility of having a disability claim
    If you are receiving a CPP retirement pension while working, and you become disabled, you cannot apply for CPP disability pension (unless it is within six months of starting your retirement pension and you repay that pension). The maximum disability pension can be about 20% higher than your maximum retirement pension.  Of course, no one expects to become disabled.
  4. Impact on your Employment Insurance
    If you are entitled to Employment Insurance, particularly seasonal workers such as fishers, you should understand that the start date of your CPP pension may impact your Employment Insurance.  This is only a consideration when you first apply for CPP. Careful planning on this timing can minimize the impact and so you should seek additional advice.

Blair Corkum, CPA, CA, R.F.P., CFP, CFDS, CLU, CHS holds his Chartered Professional Accountant, Chartered Accountant, Registered Financial Planner, Chartered Financial Divorce Specialist as well as several other financial planning related designations. Blair offers hourly based fee-only personal financial planning, holds no investment or insurance licenses, and receives no commissions or referral fees. This publication should not be construed as legal or investment advice. It is neither a definitive analysis of the law nor a substitute for professional advice which you should obtain before acting on information in this article. Information may change as a result of legislation or regulations issued after this article was written.©Blair Corkum