Welcome back to the blog!

In addition to working with clients on investment and wealth management, I write a blog on tax tips and tidbits and share other articles that I think will be of interest.

In this edition, I’m going to write about the conundrum of when to take the Canada Pension Plan (CPP), a decision that requires careful consideration in order to make the most of your government retirement benefits.

Note that I will not discuss the recent CPP enhancements in this blog.

What is CPP anyway?

So before I dive in, let’s start with a little background information.

If you’ve worked in Canada, chances are that you have contributed a portion of your employment earnings over the years to CPP such that you’re going to be eligible for CPP benefits.

Generally, the standard age to begin receiving CPP is 65, at which point you’re eligible to receive your full retirement amount. The maximum monthly amount for 2023 is $1,306.57, however, individual entitlement may vary significantly. It takes almost 40 years of earnings at or above the yearly maximum pensionable earnings to achieve this amount.

The CPP benefit is not income tested, and as such, there is no claw back like there is with Old Age Security. In other words, you will receive the full amount to which you are entitled regardless of income level. However, all payments received are unfortunately considered taxable.

Take early, late, or on time

One of the big decisions that every retiree faces is the age to commence CPP benefits.

They can begin as early as age 60 or can be deferred to age 70, however, taking CPP before or after the standard age of 65 has a material impact on the amount received.

• If you start CPP prior to age 65, the payments are reduced by 0.6 percent each month up to a maximum reduction of 36 percent at age 60.
• In contrast, if you defer benefits and start CPP after age 65, the payments increase by 0.7 percent each month up to a maximum increase of 42 percent age 70.

Now without getting too much into the details, it is important to be aware that national wage growth also affects the CPP benefit calculation in a manner that often further increases the benefit for those that defer and further penalizes those that take benefits early.

In other words, the reduction at age 60 historically over the last 10 years has been greater than 36 percent and the increase at age 70 greater than 42 percent.¹

Okay, so what is the best option?

Well, the math is quite simple - if you know exactly how long you’re going to live.

In this case, you can calculate the present value of your lifetime benefit payment at different ages, and voila, problem solved, we can find the optimal starting age to maximize your benefits.

However, given that you don’t know your own life expectancy, it unfortunately isn’t this simple after all, so let’s take a look at averages and expectations…

In Canada, a 60-year-old male is expected to live until 85+ whereas a female is expected to live even longer with an additional 2-3 years of life expectancy.¹ If we use these average age expectations, the math is unequivocal in supporting a deferral as the lifetime lost income for a Canadian receiving the median benefit that chooses to take CPP at age 60 is substantial.

Here I’ve included a table to illustrate the lifetime benefits when starting CPP at age 60, 65 and 70 across various life expectancies…

Start Age	60	65	70
Present Value of Benefits at age 75	$157,335	$169,012	$130,907
Present Value of Benefits at age 80	$206,502	$245,835	$239,997
Present Value of Benefits at age 85	$255,669	$322,659	$349,086

Numerically, starting CPP early at age 60 can equate to giving up over $100,000 of guaranteed income in current dollars that is indexed to inflation versus an individual that defers until age 70.

Okay, so now that we’ve looked at averages and reviewed a bit of the math, what do you think the most popular age is to start CPP?

Interestingly, it is in fact age 60.¹

Further over 95 percent of Canadians elect to start CPP at age 65 or earlier with less than 1 percent of Canadians opting to defer to age 70.¹

So, it seems the average Canadian would be better off deferring based on the math, right?

Well, there are a several circumstances, however, where it may make sense to start CPP earlier…

• If you cannot afford to delay and quite simply need the income right away, either because you don’t have other streams of income OR investment savings to cover your necessary living expenses.
• If you are in poor health or have a less than favorable family history that makes a shortened life expectancy a real possibility, it may make sense to receive the benefits as early as possible.
• If you were fortunate to retire before age 60, deferring and having additional years of zero contributions in your contributory period may end up shrinking your benefit.

In any event, I encourage every individual to seek professional advice prior to making a decision.

Other tidbits to know

This section could be long as the Act that governs CPP is a whopping 264 pages.

It would be impossible to touch on all the nuances within it, and as such, here I’m simply going to highlight a couple of other planning tidbits that might be helpful to consider.

• If you are 60+ years old and still working, you will have to continue to contribute to CPP even if you have started receiving benefits - the additional contributions will result in a post-retirement benefit that enhances the CPP benefit that you receive.
• If you are 65+ years old and still working, you can opt to suspend further CPP contributions, which may make sense if you are already at the maximum expected benefit based on your employment and contribution history.
• If you and your spouse lived together during the period that one or both of you contributed to CPP, are 60+ years old, are still living together, and are currently receiving CPP, you may be eligible for CPP sharing (similar to income splitting).
• There is a dropout provision for parents that experienced lower income years while being the primary caregiver for their children, so make sure this is noted in your application so that these years are excluded from the calculation to minimize their impact.
• Tax is not automatically withheld, however, you can elect to have tax withheld such that you’re less likely to have a tax balance owing on filing your return each spring.You can obtain an estimate of your benefit online through registering for the My Service Canada Account online service.
• The benefits don’t start automatically, you have to apply!

Summary

In summary, although there is no one approach that is best for all, if in good health and cash flow is not an imminent issue, delaying often makes mathematical sense, however, it isn’t just about the math, but also the individual, and their needs.

If you have questions or are interested in discussing your options further, I’d be happy to chat.

I can be reached at craig.dale@rbc.com or 604.981.6680.

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¹ https://fpcanadaresearchfoundation.ca/media/5fpda5zw/cpp_qpp-reseach-paper.pdf

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This blog and article may contain strategies, not all of which will apply to your particular financial circumstances. The information in this article is not intended to provide legal, tax or insurance advice. To ensure that your own circumstances have been properly considered and that action is taken based on the latest information available, you should obtain professional advice from a qualified tax, legal and/or insurance advisor before acting on any of the information in this article.

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