To qualify for CPP, you must be over the age of 60 and have made at least one contribution to the Canada Pension Plan (CPP). Your future income stream depends on how much and how long you contributed to CPP.
At age 65, you qualify for your full CPP payment amount (without reduction), but you must apply for this as it does not happen automatically until age 70. You have the option to take your benefit starting at age 60. There is a reduction in your payment of 0.6% for every month prior to your 65th birthday. There are many factors to consider for early CPP payments which can include your current income, your marital status, your life expectancy and looking at future taxable income streams when you turn 65 and OAS starts.
To illustrate early CPP payments at 60, let’s look at twin sisters Sarah and Jennifer who at 65 both will qualify to receive monthly CPP of $1,000. Sarah takes CPP at 60 at a 36% reduction (0.6% x 60 months) = $640 per month.
At 65, Sarah has now earned $38,400 before Jennifer gets 1 payment of $1,000. So what is the breakeven age? It will take Jennifer 106 months, or until age 74, to collect the same government pension as Sarah.
Married couples can benefit from income splitting at 55 or 65 depending on the pension income type. Typically in early retirement 55-65, taking CPP early at 60 can pay-off based on the breakeven age and income splitting strategies. Let’s take a couple who are the same age and qualify for the maximum monthly benefit. If both took at 60, the total government benefit received by both for 5 years would be over $88,671. If they waited until 65 and one died after the first year they would have only collected $27,709.92. It would take many years to breakeven with future monthly payments of only $1,154.58 (both the maximum CPP payment and the maximum CPP & survivor payment) to make up for the $88,000 already received.
Without the ability to predict life expectancy, many clients appreciate the extra income earlier in retirement for travel when they are healthy and can enjoy a more active lifestyle or top up their TFSAs.
This information is not intended as nor does it constitute tax or legal advice. Readers should consult their own lawyer, accountant or other professional advisor when planning to implement a strategy.