A common question I’ve been getting from clients is about when to start taking their pension from the CPP (Canada Pension Plan). You can start taking CPP any time between the ages of 60 and 70, but when is the best time to start? Some Canadians prefer to take advantage of their pension as soon as possible, but as with most decisions, there are trade-offs. If you start taking CPP earlier, you’ll get them for longer but the payments will be reduced, and if you take them later on, the payments will be larger.
Age 65 is the standard age at which people take CPP. You are eligible for your pension once you reach age 60, but the payments will be reduced by 0.6% for every month before your 65th birthday. That would amount to 7.2% less each year, and assuming you start taking payments as soon as you’re eligible, it would result in a 36% reduction in total (7.2% annual reduction for 5 years). On the other hand, delaying until after age 65 will result in a pension increase by 0.7% per month until a cap at age 70, at which point there will be no further increases. This would result in an 8.4% annual increase and a 42% maximum increase of your CPP retirement benefit compared to the benefit payment if you’d begun CPP at age 65.
Keep in mind that CPP retirement benefits do not start automatically when you reach a certain age. You can apply up to 12 months before you would like your pension payments to begin. The maximum monthly CPP payment amounts are indexed (annually) and posted on the Government of Canada website, and as of 2020, the maximum payout is $1,175.83 per month for those that have maximized their CPP contributions throughout their careers.
Deciding when to start collecting your payments is an important part of retirement planning and may seem daunting, so here are some things to consider to make a personalized decision.
How is your current health situation?
Your health and family health history should be one of the main determinants of whether you decide to take your pension closer to age 60 or later on. For those that are healthy and expecting to live a long life, it may make more sense to wait longer to start collecting your pension. As we’re currently in a low-interest-rate environment that is likely to persist, the monthly increases to your pension from being patient could be quite beneficial. On the other hand, if you are experiencing poor health and expecting a shorter-than-average lifespan, then it would generally make sense to start collecting earlier.
Do you have other sources of income?
There may be other sources of income you can rely on to support your retirement. You may decide to delay receiving your CPP pension if you have sufficient income or resources for a comfortable lifestyle, such as employment income, rental income, or the projected income from an investment portfolio. CPP benefits are indexed and guaranteed for your lifetime. The longer you wait, the higher your benefit payments will be. Individuals who are already reporting a higher level of income, may also decide to delay their CPP pension so as not to push their reported income to a level that would trigger a claw back to their Old Age Security (OAS) pension.
Are there any immediate financial needs?
Do you have any immediate financial needs? At the end of the day, collecting the CPP earlier means taking a smaller amount now versus waiting for more later, but it’s still a source of funds that’s available to you should you need it. Everyone has a different financial picture, and while some can afford to start collecting later, some may need to take payments as early as possible.
If you pass away before or while collecting your CPP payments, the CPP will provide a CPP death benefit in the form of a CPP survivor’s pension, and/or a CPP children’s benefit. In addition, if you are curious about how large of a CPP pension you are entitled to, you can get an estimate of your retirement benefit from your ‘CPP Statement of Contributions’ that can be found either online through the My Service Canada Account or by mail with Service Canada.
The decision about when to start collecting should be considered as a part of your overall retirement plan. Speak to your advisor to develop a plan to help you attain your retirement goals.