When Should I Apply for My CPP?

March 19, 2010

By Heather Compton and Dennis Blas

Question:
Is it better to apply for my CPP income early at age 60 or wait until age 65?

Answer:
Every finance question under the sun has only one correct answer – “it depends”, followed by a long list of caveats. The first thing you should know is that there are new changes to the CPP program.

For 2010, the maximum retirement benefit payable at age 65 is $11,210 a year or $934 per month. It is indexed annually for inflation and is received as a taxable benefit. Unfortunately, If you were a homemaker and did not work outside the home then you will not be entitled to receive CPP/QPP benefits (except under survivor benefit rules).

CPP/QPP can be taken as early as age 60 provided you have “substantially ceased working.” Early pension will be discounted by 0.5% per month or 6% per year. This equates to 30% less income, $7,634 in 2009 at age 60. For many that is a bigger “haircut” than they can afford. If you choose to delay retirement, you can increase it by 6% per year for up to 30% more at age 70. I have to confess that of the hundreds of clients I dealt with over the years, not one chose to take it later. They couldn’t wait to get their hands on the money. This will change in the future.

In May 2009, the Minister of Finance proposed changes to the CPP Program that were passed by Parliament in December 2009. These changes will come into effect for those taking benefits in 2011. The Work Cessation test was removed for those taking benefits at age 60 and the percent of “drop-out” years that can be used to eliminate low CPP contribution years were marginally improved. The changes also affected early retirement and late retirement factors.

Under the changes, the early retirement reduction factor has been increased from 0.5% to 0.6% for every month prior to age 65. This will be phased in over 5 years – 0.52% in 2012, 0.54% in 2013, 0.56% in 2014, 0.58% in 2015, reaching 0.60% in 2016. You will have to really think twice before accepting a 36% reduction in income! Those who defer retirement beyond age 65 will benefit from an increase in pension from 0.5% to 0.7% for each month that the pension is delayed after age 65. This will be phased in over 3 years to encourage delayed retirement – 0.57% in 2011, 0.64% in 2012, 0.70% in 2013 and onward.

The changes also mean that it will be possible to retire gradually, and to draw benefits and continue to accrue benefits at the same time; I’m pleased to see the government encouraging Canadians to work in more flexible ways than previously possible! Full details on both CPP and OAS can be found at Service Canada. You must file an application in order to receive benefits.

I know, I didn’t really answer the question – my final answer is “it depends”!

About the Authors: Heather Compton has presented seminars on financial and retirement lifestyle issues for over 30 years. She retired as Vice President and Senior Investment Advisor with a major financial services company. Heather and husband Dennis Blas co-present retirement seminars for a variety of corporate clients and are the co-authors of Retirement Rocks! Canadian Boomers Invest in Life. You can find their book online or in independent bookstores. See more of their advice at Retirement Rocks.

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