When should you start taking payments?

You’re turning 60 this year! Congratulations!

 

One of the benefits, besides cheap movie tickets, is that you’re probably eligible to receive Canada Pension Plan (CPP) payments. However, you also have the option of deferring payments to a later age. Does it make sense to take CPP at 60? 65? 70?

 

Below, we examine the mechanics of CPP payments and the considerations regarding when to take such payments. In addition, we examine how these payments may affect other monetary programs for seniors, such as Old Age Security (OAS) and the OAS clawback.

 

Important note: CPP is a complex program. In this article, we introduce several important considerations. However, we strongly recommend consulting with your private wealth counsellor or other specialist to review your individual situation.

What is the Canada Pension Plan (CPP)?

Per the Government of Canada website,1 “The Canada Pension Plan (CPP) retirement pension is a monthly, taxable benefit that replaces part of your income when you retire. If you qualify, you will receive the CPP retirement pension for the rest of your life. To qualify you must:

 

  • Be at least 60 years old
  • Have made at least one valid contribution to the CPP 

Valid contributions can be either from work you did in Canada, or as the result of receiving credits from a former spouse or former common-law partner at the end of the relationship.”

 

The Quebec Pension Plan (QPP) is similar to CPP and works in tandem to ensure all contributing Canadians are protected.

How much pension can I expect from CPP?

The amount you receive each month is based on several factors, including:

 

  • Your average earnings throughout your working life
  • Your contributions to the CPP, which are based on your annual earnings2
  • The age you decide to start your CPP retirement pension

How do I start receiving CPP payments?

CPP payments are not automatic. You must apply. You should apply before you want your pension to start, especially if it is an integral part of your retirement income.

When should I start receiving CPP payments?

One of the biggest choices Canadian retirees face is deciding when to take CPP. Taking benefits earlier means more years of receiving them. However, delaying CPP benefits means greater annual payouts.

 

The earliest you can take your CPP benefits is the month after your 60th birthday. However, the Canadian government has incentivized waiting to take CPP benefits by reducing payments for those who start before age 65 and increasing payments after age 65. Every month after the age of 65 that you delay receiving CPP, the benefit increases by 0.7%. Conversely, if you start drawing your CPP retirement pension before your 65th birthday, the amount received decreases by 0.6% every month. The additional benefit of delaying CPP payments until a later age can be substantial.

 

Age

Maximum monthly CPP payment amounts (2021)

60

$770.40

65

$1,203.75

70

$1,709.33

How powerful are these additional benefits?

In December 2020, the National Institute on Ageing released an updated report on CPP, and it’s difficult to imagine a more strongly worded argument for delaying CPP than the following:

 

“These incentives — combined with the strength of these programs — have made delaying CPP/QPP benefits for as long as possible the safest, most inexpensive approach to get secure, worry-free retirement income that lasts for life and keeps up with inflation.3


Why should I consider taking CPP payments at age 60?

We have clearly illustrated the additional benefits of delaying CPP payments until later, but here are some considerations for taking CPP early.

 

  1. You need the money now. For example, if you are short of funds for mortgage payments or other debt obligations, it may make sense to take your CPP payments early to avoid future debt penalties or interest.
  2. Poor health considerations. CPP breakeven calculations are complex, and, accordingly, we use a rule of thumb of 80 years. If you don’t believe you will live longer than 80 years, you should consider taking CPP at 65 or earlier. However, if your health challenges qualify as a disability and you meet the contributory requirements, a CPP Disability benefit is better than taking your CPP retirement pension early. 
  3. Lifestyle expectations. If you plan to live lavishly during your initial years of retirement, you may need the extra CPP income to maintain your lifestyle during these active years.
  4. Survivor benefits. When a spouse who was eligible for CPP payments dies, the surviving spouse is eligible to receive a survivor’s pension. The amount of CPP survivor’s pension you receive depends on a few factors and tricky calculations that Service Canada uses according to your situation. However, in general, surviving spouses will have their CPP payments topped up, provided they were not already receiving payments equivalent to the benefits they would receive at age 65.

What is Old Age Security (OAS)?

At age 65, you are eligible for old age security, depending on how long (but at least 40 years) you have lived in Canada after the age of 18. The OAS is a monthly benefit paid to seniors to supplement living expenses. Unlike the CPP, the OAS is funded by general revenues of the Government of Canada. This means no one pays into OAS directly.

 

OAS clawback

However, higher-income Canadians may experience the OAS clawback — formally known as the OAS pension recovery tax. The clawback is based on your net income in the previous calendar year and is indexed to inflation.

 

For 2021, the clawback will be triggered when net income hits $79,054. For every dollar above that threshold, your OAS benefit is reduced by 15 cents. As a result, individuals who are eligible for the current maximum pension of $618.45 per month at 65 would have their entire OAS clawed back when their net income reaches $129,260.

 

Possible solutions

How might you stay out of the clawback zone or at least limit its impact? You can employ several strategies to reduce your pension income in a taxation year. Some of these include:

 

  • Defer CPP payments to a later age. This can help you avoid additional income in a taxation year. 
  • Split pension income. Pension-splitting allows higher-income earners to lower their tax bills by transferring up to 50% of eligible pension income to a spouse. 
  • Defer OAS. If you are still working past age 65, deferring your OAS can be a good strategy for many reasons. For every month that you defer taking your OAS, your payments increase by 0.6%. So by deferring for the allowable five years (until you turn 70), you will increase your monthly benefits by 36%. When you stop working and your income declines, you will receive a larger benefit and will be less likely to trigger clawback.4

Thus, OAS planning should be a consideration when deciding on the best age to receive CPP benefits. If you anticipate income from other sources (along with CPP), you should consider delaying to ensure you continue to receive such benefits.

Conclusion

There is no one-size-fits-all answer for the best time to take your payments. Deciding when to take CPP and OAS should be based on your individual circumstances and take into account your life expectancy, current and future tax brackets, your immediate versus future income needs, and the impact taking CPP has on other benefits, such as Old Age Security.

Michael Schachter, LLB, MBA
Michael Schachter, LLB, MBA
Private Wealth Counsellor,
Mercer


1 Government of Canada. “CPP Retirement Pension: Overview,” April 27, 2020, available at https://www.canada.ca/en/services/benefits/publicpensions/cpp.html.

2 Ibid.

3 MacDonald BJ, National Institute on Ageing, Ryerson University. Get the Most from the Canada & Quebec Pension Plans by Delaying Benefits: The Substantial (and Unrecognized) Value of Waiting to Claim CPP/QPP Benefits, 2020, available at https://www.fpcanadaresearchfoundation.ca/media/5fpda5zw/cpp_qpp-reseach-paper.pdf.

4 Government of Canada. “Old Age Security Payment Amounts,” March 31, 2021, available at https://www.canada.ca/en/services/benefits/publicpensions/cpp/old-age-security/payments.html

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