With Canadians more financially squeezed than ever, many older citizens are wondering if they should take early Canada Pension Plan benefits. New rules might affect people's decision-making.
"Taking CPP early is generally viewed to be a case of a bird in the hand is better than two in the bush," says Rogers Group financial advisor Teresa Black Hughes (rogersgroup.com/). "It's a mortality game. How long will you live?"
The normal age for receiving CPP is 65, but you can start receiving the pension benefit as early as age 60. The federal government is introducing changes to monthly amounts gradually over several years.
Here's how the new rules work.
If you take the CPP retirement pension after age 65, your monthly amount will increase by a larger percentage than if you were to take it earlier.
Before the new rules, your CPP retirement pension increased by 0.5 percent for every month after age 65 and up to age 70 that you delayed receiving it.
From 2011 to 2013, however, that monthly percentage will rise from 0.5 percent per month (or six percent per year) to 0.7 percent per month (or just over eight percent per year). This means that, by 2013, if you start receiving your CPP pension at the age of 70, your pension amount will be 42 percent more than if you had taken it at 65.
Furthermore, if you take CPP before age 65, your amount will decrease by a larger percentage than if you wait.
Before the changes, your CPP retirement pension was reduced by 0.5 percent for each month before age 65 that you began receiving it.
But from 2012 to 2016, that will switch from 0.5 percent to 0.6 percent per month. This means that, by 2016, if you start receiving your CPP pension at the age of 60, your pension amount will be 36 percent less than had you taken it at 65.
"Assuming that you qualify for the maximum CPP at age 65, drawing in 2012 at age 60 means that you will receive $678.83 per month," Black Hughes explains. "If you were age 61, you would receive $740.40; age 62, $801.97; age 63, $863.53; age 64, $925.10; and age 65, $986.67.
"CPP is a reliable part of your retirement income and has historically had a modest amount of indexing," she adds. "However, if you need the cash flow…it makes sense to draw early….A female aged 60 has a 50 percent chance of living to age 86; a male aged 60 has a 50 percent chance of living to age 83."
ScotiaMcLeod wealth advisor Rhonda Sherwood (rhondasherwood.com/) points out that taking CPP early means several years of extra cash flow.
"Under the previous penalty of five percent per year, if you were entitled to $600 at age 65, you would only receive $420 at age 60. However, by taking CPP early, you would have received about $25,200 early cash flow," Sherwood says.
There are several factors to take into account when deciding whether to take CPP before 65, according to Sherwood.
"You may have a shortfall in your cash flow to pay for day-to-day costs. Even with the deduction, taking CPP early helps bridge this shortfall," Sherwood says.
"In the early retirement years, you may want more cash flow to fund the costs of things like hobbies, travel, and funding the family cottage," Sherwood notes. "But as people age, they tend to settle more into day-to-day living and spend less time and money on lifestyle. So taking CPP early may make more sense."
Taxes and claw back
If you are in a higher tax bracket and CPP at age 65 will make you subject to claw back on your Old Age Security pension, Sherwood says you may want to look at the benefits of taking CPP earlier at a reduced amount. "However, you want to be sure the extra tax you pay on your higher overall income from taking CPP early is not greater than the amount of dollars that will be claw backed off your OAS from an unreduced CPP benefit at age 65," she says.
If you are in a lower tax bracket between the ages 60 to 65, Sherwood says, you might want to have your accountant assess if it's better to start taking out RRSP payments at a lower tax rate versus taking early CPP.
If you invest that monthly cash flow in something producing steady dividends, you may make up for that reduced monthly payment and then some.
"If you semi retired well before age 65, then the amounts you're contributing to CPP has also been reduced, potentially affecting your overall CPP benefit," Sherwood says. "You can start taking CPP at age 60 while continuing to work, while it used to be that you had to stop working in order to collect your CPP. So if cash flow is tight, you can collect your CPP while still working full or part-time.
"If you have an illness or a family history of shortened lifespan, then taking CPP early may make sense," Sherwood says. "For example, if you estimate living only into your early 70s, then financially you will be better off taking CPP early at a reduction but with 60 extra payments."
"The break-even point is basically a calculation that determines whether taking early or late CPP is a better financial option," Sherwood explains. "The break-even point ranges from the mid to late 70s. If you live well into your 80s, taking CPP at age 65 or later is the better option, financially speaking. Be sure to assess all the other factors before making a decision based strictly on life expectancy."