Retire now, or later? How CPP changes affect you
Changes to the Canada Pension Plan start taking effect this month and are designed to encourage people to work longer before they start drawing a government pension.
The changes take place gradually over the next five years and make it much harder to figure out when to retire and how to ensure you receive the maximum benefit.
What’s changing is that incentives to retire between 60 and 64 are being reduced, while incentives to start taking the pension later are being improved. Ottawa is doing this to encourage people to retire later and allow them to collect CPP and continue to contribute to the plan until age 70 if they are still in the workforce. Here are the new options and what they mean to you:
Taking CPP early
Until now, it has only been possible to collect before age 65 if you stop working for at least two months. However, beginning in 2012 you will be able to get your CPP at any time after age 60 - even if you are continuously employed.
But if you decide to apply for CPP between age 60 and 64, you will take a bigger hit. For example,
•Mary turned 60 in October last year and applied for CPP. Since she is starting early, she will receive $672 per month beginning this January - 30 per cent lower than if she waited until she was 65.
•Joan is 55 and plans to start collecting CPP when she is 60 in January 2016. Because the new rules for taking the pension early will be fully phased in by then, she will receive only $614.50 per month, or $57.50 less each month (based on 2011 figures).
If you work and collect early CPP, you also need to be aware of new contribution rules. One bonus if you start CPP this year at age 60 is that both you and your employer will not have to contribute for the balance of the year. However, beginning in 2012, contributions must be resumed for all employees under 65. Of course, the upside is that if you work and contribute, you will also accrue additional benefits.
When does it make sense to apply for CPP early? Although the changes will reduce incentives for early retirement, consider starting your pension before age 65 if:
•Your life expectancy is below average (age 80-85).
•You are sick and cannot qualify for CPP disability.
•You have low income or no other source of income.
•You are laid off and unable to find other employment.
•You have a continuous employment history.
•You are not divorced and there has been no credit split.
Retiring at age 65
Age 65 is the CPP normal retirement date and that is not likely to change in the foreseeable future. A recent report questioned whether Canada should up the age for full pensions to between 67 and 69. However, the government will not be forced to take on this political hot potato because CPP is currently sustainable and the changes will help to ensure continued financial stability of the program.
So if you are 65 in 2011, you can collect a maximum benefit of $960 per month. Consider starting to receive CPP at your normal retirement date if:
•Your health is average.
•You have average life expectancy (age 80-85).
•You have a medium income with some other sources of income.
•You are unable or unwilling to work beyond 65.
•You are continuing to work (perhaps part-time) after age 65 with lower than average earnings.
•You have a continuous employment history with some gaps.
The centerpiece of the CPP amendments is additional incentives for Canadians to defer collecting CPP until as late as age 70. Contributions will be optional if you work from age 65 to 70, but if you continue to work and choose to contribute, additional pension will accumulate.
Even if you elect not to contribute between ages 65 to 70, CPP changes will put more money in your pocket than if your CPP began at your normal retirement age.
If you started CPP in 2010 at age 65, the maximum you could collect would have been $908.75 per month. But your neighbour, who waited until age 70 to cash in is receiving 30 per more, or $1181.37. And by 2013, seniors who delay CPP until age 70 in will get cheques that are 42% higher than 65-year old claimants.
So when does it make sense to delay receiving CPP? Consider taking CPP pension benefits later if:
•You are healthy
•Your life expectancy is above average.
•You have a high or medium income or some other sources of income.
•You continue working with your average or above average earnings,
•You have an employment history with considerable gaps.
•You are divorced and lost some pension credits due to a credit split.
Sheryl Smolkinis a pension and benefits lawyer, writer and editor living in Toronto.