We’re regularly reading that Canadians are healthier, better educated, and living longer compared to the past. This could mean that you spend as many years in retirement as you did working. To give flexibility to Canadians adapting to demographic as well as labour market trends, the Canada Pension Plan (CPP) is phasing in changes over the next five years that will likely affect you.
If you’re already collecting CPP, these changes will not have an impact on you.
Previously, if you started collecting CPP before the age of 65, your pension benefit was reduced by 0.5% per month for each month that your pension is taken before your 65th birthday. The maximum reduction was 30% over five years.
With the new legislation, if you decide to collect CPP before you turn 65, your pension benefit is reduced by 0.6% per month for each month before your 65th birthday. The maximum reduction in your benefits has also been increased to 36%. This change will gradually take place over five years beginning in 2012.
The new legislation will also increase the rewards to you for working longer and deciding to collect your CPP after age 65.
Your pension benefit will increase by 0.7% per month for each month you delay receiving your CPP after your 65th birthday. The maximum increase in your CPP benefit is 42% up to age 70. This change will also gradually take place, but over only three years and beginning in 2011.
Previously, if you began receiving your CPP benefits and subsequently decided to return to work, you were not required to restart your CPP contributions as a working beneficiary.
With the new legislation, if you choose to collect your CPP benefits early but continue to work, you and your employer will have to continue contributing to the CPP. In other words, all working beneficiaries of the CPP must contribute to CPP until age 65. You can choose to voluntarily continue contributing until age 70 and accrue additional benefits up to a maximum.
The new legislation eliminates the requirement to stop working or reduce income in order to qualify for a CPP pension.
Previously, if you wanted to begin your CPP benefits before the age of 65, you needed to stop working or demonstrate a reduction in earnings for at least two months to qualify.
The new legislation gives you more flexibility. In order to receive early CPP benefits, you’ll no longer have to stop working or reduce earnings. As of 2012, you can receive benefits as early as age 60 without work interruption or reducing your earnings.
The amount of monthly benefit you can receive depends on how many years you worked and how much you contributed to the Plan.
The previous CPP retirement payment rules were based on a 47-year career. There was a ‘drop-out’ provision allowing you to drop about seven years of low or no earnings from your calculation.
Under the new legislation, the above ‘drop-out’ provision has been increased. The change is in favour of those experiencing work interruptions that occur for various reasons such as going back to school or taking time off to care for aging parents.
How will you decide when you should take your CPP payments?
Early CPP payments might make sense for you if you’re in poor health but don’t qualify for CPP disability. If your life expectancy is low, your income is low, and you have the sense that you will have difficulty finding or keeping steady work, early CPP payments should be considered. If you’ve had a continuous employment history, early CPP payments will make more sense for you than if you’ve worked inconsistently.
Delaying CPP payments might be worthwhile for those in good health with a life expectancy above average, decent income and good prospects for continued employment past age 65. If you’ve had an employment history with considerable gaps, it might make sense for you to delay receiving your CPP payments beyond age 65. And if you’re divorced and have lost some pension credits, delaying your CPP might also make sense.
For those in the middle – average health, life expectancy, income, and employment history, go ahead – collecting your CPP benefits when you retire at age 65 makes good sense.
So in conclusion, the changes to CPP benefits summarized above will likely not make an enormous impact on whether you choose to collect early or late – it will remain a tricky decision.
A good place to start is on the Service Canada website – we have some useful links that may be helpful in getting you started: http://www.hayashiholden.ca/resources/useful-links
Heather Holden, PhD, CIM
Wealth Advisor, ScotiaMcLeod
1100 – 650 West Georgia St.
Vancouver BC V6B 4N9