When it comes to the Canada Pension Plan (CPP), it really is a matter of deciding when to take it. While there is no rule of thumb, there is a specific answer for each person. In today’s blog post, I will give a quick overview of what the Canada Pension Plan is, and show you how to find the right time to collect this retirement pension.
What is the Canada Pension Plan and who is eligible?
The Canada Pension Plan is a retirement pension that provides a monthly taxable benefit to retired contributors.
To be eligible for the CPP, there are three qualifications:
1. You must have worked in Canada
2. You must have made at least one contribution to the CPP
3. You must be at least 60 years of age
When can you begin to receive your Canada Pension Plan?
The earliest you can begin to receive your CPP is at the age of 60. However, the standard age to start is 65, and there are definite advantages if you choose to defer collecting your pension. From 2012 to 2016, new rules in the Canadian government state that the early pension reduction will gradually be increased from 0.5% to 0.6% per month if you take it before the age of 65. This means that by 2016, if you are at the age of 60 and decide to collect your pension, you will be penalized and your pension amount would be 36% less overall than it would have been if you had taken it at the age of 65.
If you choose to delay receiving your CPP, the latest you can defer taking it is at the age of 70. Under the new rules, for every month you elect to wait past the age of 65, you will receive an enhancement of 0.7% per month. This means that if you choose to collect your CPP at the age of 70, you will receive an overall enhancement of 42% enhancement to your pension.
1) Get an estimate of what your pension is going to be.
If you are approaching retirement, it is important to obtain an estimate for your pension. Try using the Canada Retirement Income Calculator to help you get started.
2) Consider all the factors before deciding to take your pension.
- Are you still working and contributing to the CPP? Continued contributions will enhance your CPP when you decide to collect.
- How long have you contributed for? The longer you contribute, the more you will receive.
- What are your other sources of retirement income? CPP income is taxable income. By collecting your pension early, this means that adding more income to your plan could push you into a higher tax bracket. If you don’t need the extra income, avoid this step.
3) Recognize that your health may play a role in helping you decide to collect your CPP.
If your health is poor, you may want to start collecting early to ensure you receive as much benefits throughout your lifetime as possible. Remember that the earliest you can start to receive your CPP is at the age of 60. Sometimes, this may be a better option for you.
4) Be very, very clear on what your retirement plans are.
Ask yourself: do I want to retire? Do I need to retire? Just because there is money available to you, it doesn’t mean you have to accept it. You can wait and defer it until you are 70. Knowing what your retirement plans are is very important because it will help you get a better idea of when the right time to collect is for you.
5) Find out if it is better or worse for you if you delay receiving your pension.
If you stop working at the age of 60, but defer collecting your pension until 65, you must take into account the extra five years of no income. In essence, you are lowering your average wage over the life of the plan by including these zero income years, which will likely reduce your overall CPP benefit.
As I said in the beginning, there is no rule of thumb when it comes to knowing when to apply for your Canada Pension Plan, but there is a right answer for you. You can begin by collecting your CPP only when you need to, and not before, but the most important thing to remember is to always assess your situation in conjunction with your overall financial plan. Financial planning is key because it allows you to work with a CFP and come up with a comprehensive plan that will show you how the different scenarios in life could affect your finances in the future. For example, if you are wondering what would happen if you start collecting your CPP at the age of 65, your CFP could model that out for you so that it becomes clearer.
Financial planning is so critical to your future and a key component to making good decisions. Head over to our website to check out the different tools and resources we have to offer, including your report on the 12 Key Questions You Must Ask a Financial Planner before You Hire One, and work with your financial planner today to talk about your Canada Pension Plan.
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