Deferring collection of CPP to age 70 could pay

Kristine Owram

Thursday, October 01, 2009

Deferring collection of your Canadian Pension Plan benefits could pay off financially under proposed changes to the CPP rules, but first it's important to undertake the somewhat morbid task of figuring out how long you expect to live.

The proposed changes, which will begin to be phased in 2011 if they're approved by Parliament and the provincial governments, aim to provide retirees and older workers with greater flexibility and more choice.

If implemented, the changes would increase or decrease pension adjustments for people who choose to receive their CPP benefits either earlier or later than the normal collection age of 65.

Currently, the amount a person receives is reduced by 0.5 per cent for each month the pension is taken before age 65 to a maximum of 30 per cent. Conversely, the pension is increased by 0.5 per cent for each month it's taken after age 65 to a maximum of 30 per cent.

The changes will increase the early pension deduction to 0.6 per cent per month to a maximum of 36 per cent, while the late pension increase will be 0.7 per cent per month to a maximum of 42 per cent.

“We find very few people actually postpone retirement past 65 because a lot of people don't realize that you actually get a premium if you're willing to postpone your CPP as late as 70,” said David Ablett, director of tax and retirement planning at Investors Group. “It's almost like a race where somebody starts earlier but the person who starts later is a faster runner.”

Mr. Ablett said the proposed changes make it more attractive than ever to defer receiving your CPP as long as possible – assuming you expect to live a long time. “The more confident you are in your life expectancy, the more attractive the deferral becomes, because eventually you will generate a higher cumulative income from CPP by waiting, rather than starting early,” he said.

Mr. Ablett said if you decide to collect your CPP earlier or later than age 65, it's important to take into consideration the so-called “break-even point,” or the point at which your CPP income will catch up with where it would have been had you started collecting right at 65.

“Assuming that somebody started receiving their CPP at age 61, the break-even point is age 71, and what we mean by that is at age 71 the cumulative payments received starting at age 65 would become equal to the cumulative payments that started at age 61,” he said. “There's no right or wrong answer, but a lot of it would be based on how long you expect to live.”

Another factor to consider is whether you need to live on CPP income, or whether you can afford to invest it. If you can invest it, Mr. Ablett said, the break-even point will come much earlier. “If you have the ability to reinvest your CPP income, that would actually encourage you to start your CPP early and not wait until 65,” he said.

Other proposed changes to the national pension plan would allow people to receive their CPP benefit at age 60 while continuing to work full-time. Currently, workers who opt to receive the benefit early have to either stop working or reduce their wages.

The changes would also allow people who receive a CPP benefit while working to continue to make contributions to the plan, which will increase their overall retirement benefit. Currently, if you opt to receive your CPP while working you have to stop contributing to the plan.

Marcel Theroux of financial advisory firm Mercer LLC commended the changes for facilitating phased-in retirement but questioned how easy it will be for individuals to figure out what the smartest move is for them.

“Unfortunately, employees wishing to gauge the precise impact of these new rules on their particular situation may be stymied by both the complexity of the calculations and the absence of data on their complete work history. Employers will no doubt be asked by continuing employees whether they should take a CPP pension or not,” Mr. Theroux said.

“The government will face pressure to either develop tools or provide sufficient information to permit employees to determine the precise impact that the proposed changes will have on their CPP entitlements in order to permit employees to make informed CPP decisions,” he added.

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