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16
CPP – Now or Later?
February 16, 2015

Starting Early

You can elect to begin receiving your CPP retirement pension as early as age 60 – but at a price.  There is a penalty of 0.6% for each month the pension starts before your 65th birthday.  Those who start at age 60 will suffer a penalty of 36% of their pension entitlement.  Thus, if your Statement of Contributions from Service Canada shows that you would be entitled to a $1,000 per month pension at age 65, your pension will only be $640 per month if you start at age 60.  If you continue to work after you receive your pension, you must still continue to contribute to CPP until age 65.  After you reach 65, you can opt out of contributing if you’re already receiving your pension.  On the bright side, those extra contributions will earn you a small additional pension called a post-retirement benefit.

Delaying

If you delay starting your pension beyond your 65th birthday, you’ll receive a larger monthly benefit.  Your pension will be increased by 0.7% for each month you delay – for up to 60 months.  If you delay until your 70th birthday, your pension will be increased by 42%.  For example, if you were entitled to a $1,000 per month pension at age 65, and you delay until age 70, your pension will be $1,420 per month.  On the down side, you’ll have to continue contributing to age 70 if you continue to work.  Those extra contributions will earn you an additional post-retirement benefit.

Longevity

Perhaps the most difficult question to answer is “How long will I live?”  The longer you live, the longer you’ll receive your pension and therefore the more you’ll get from CPP.  A general rule of thumb is that if you’ll live beyond age 74, you will benefit from delaying the start of CPP.  If you live to age 80 or beyond you’ll get more from CPP if you delay starting to age 70.  The average Canadian who makes it to age 65 will live to about age 85.

Death

When you die, the maximum death benefit from CPP is $2,500.  If you have a spouse, they will be entitled to a survivor pension of 60% of the deceased taxpayer’s pension entitlement.

Pension Limits

The maximum CPP retirement pension for 2015 is $1,065 per month (excluding any post-retirement benefit and increase for delaying).  That maximum includes both the taxpayer’s own CPP retirement pension and any survivor pension that they are entitled to.  This means that where both spouses have CPP pension entitlement, the amount of the survivor pension may be reduced or even eliminated

 

Case Study – Twin Brothers

Frank and Martin are each entitled to a CPP retirement pension of $1,000 per month at age 65.  Both will retire at age 60 but Frank will start his CPP pension at age 60 and Martin will wait until he is 70.  Who will receive the most from CPP?

The answer depends on how long each of them lives.  Frank’s CPP pension will be $640 per month while Martin’s will be $1,420.  However, Frank will receive $76,800 (indexed) before Martin gets his first cheque.  Clearly if they die before age 70, Frank will have received more as Martin’s only benefit will be the CPP death benefit.

The table below shows the accumulated pension received by each at various times in the future.  Amounts shown are in current dollars (i.e. not indexed for inflation).

 

AGE

60

65

70

75

80

85

90

95

100

FRANK

$0

$38,400

$76,800

$115,200

$153,600

$192,000

$230,400

$268,800

$307,200

MARTIN

$0

$0

$0

$62,520

$125,040

$187,560

$250,080

$312,600

$375,120

 

By starting early, Frank receives more pension than Martin until they reach age 86.  If they live beyond age 86, Martin’s accumulated pension will exceed Frank’s.

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