Readers' CPP questions answered
Last week in this space, we talked about the pitfalls couples face when it comes to collecting their CPP pensions after one of them dies.
Even if both partners have contributed all their lives, the sum of the deceased person’s pension and the survivor's pension can’t be more than the maximum allowed.
Practically speaking, this means that many dual-income couples with decent work experience won’t ever see much in the way of survivor benefits. In many cases, their CPP pension will essentially die with them.
Judging from my mailbox, the fact that there’s such a ceiling on CPP survivor benefits really upsets some readers. So much so, that many have been quizzing me on their other assumptions about the CPP.
Here then are some of their concerns and a few suggestions to help frame your thinking.
Should I take my CPP pension as early as I can?
It depends. The longer you live, the more money you can expect to collect from the plan.
Most actuaries estimate that women who retire at age 60 – the earliest age at which you can collect – will live to something like 84, on average. Men who retire at age 60 are expected to live to an average age of 81.
Most people tend to underestimate the life expectancy – but there are, of course, no guarantees that you’ll actually live that long.
If you’re now 60 and you live to be in your 80s, taking CPP earlier than 65 would mean a lower total pension income over your lifetime.
On the other hand, if you need the income and would otherwise have to draw from RRSPs, starting CPP early could work for you because it would mean that your RRSP funds can stay tax-sheltered longer.
How much will I lose by taking my pension at 60?
Until recently, if you started taking benefits at age 60 you received 30 per cent less annually than what you would have received if you started at age 65.
Since 2012, that penalty for starting at age 60 has been increasing and will climb gradually to 36 per cent annually by 2016.
Conversely, the annual bonus for starting to receive benefits at age 70 has been 30 per cent more than your age 65 entitlement, but that will increase to 42 per cent by 2016.
All of which means that the crossover, or break-even, point between taking CPP at 60 rather than 65 – assuming you don’t continue to work or reinvest that CPP money – is somewhere around age 75.
The more confident you feel about living beyond that point, the stronger the argument for waiting.
How can I figure out what I’m likely to get?
The amount you'll eventually receive depends on your time in the plan and your career earnings going back to Jan. 1, 1966, or when you reached age 18, whichever was later.
To get a detailed estimate, go to the Service Canada website where you can download a history of your CPP contributions and an estimate of the potential monthly pension.
One thing to look at is your dropout period. If you contributed to CPP for 46 years, for example, approximately 7.5 years (or 16 per cent) of this time period will be excluded from the calculation, potentially boosting your pension.
Next year, the percentage will rise to 17 per cent, which will allow up to eight years of low earnings to be dropped.
Your work history matters. If you’ve had too many years of low or no earnings and don’t see yourself working any longer, you might be better off taking your CPP early rather than waiting until 65.
Do I have to stop working before I can collect?
No. Under the old rules, if you decided to take your CPP pension before 65, you had to either stop working or significantly reduce your earnings for at least two months.
Now, however, you can take your CPP pension as early as age 60 without having to stop working or reduce your earnings artificially.
If choose to collect at age 60, can I still contribute to the plan?
Yes, if you’re still working – in fact, you’ll have to. Until the recent changes, once you began to draw your CPP, you could no longer contribute even if you still had a job.
Now, if you’re receiving a CPP pension and choose to work, you and your employer will be required to make contributions until age 65 – after that they’re voluntary.
The good news is that this will increase your pension through the Post-Retirement Benefit (PRB), a new lifetime benefit that’s separate from your CPP retirement pension.
Contributions towards the PRB will generate a separate benefit payable as early as January 1st of the year following the year you made the contributions.
What if I don’t work after 60, but wait until 65 to collect?
That would be a mistake. The extra five years of no earnings will actually lower the CPP pension payable at 65.
This is because the period you’re expected to pay into the plan continues until you actually start receiving your benefits. So essentially adding five years of zero earnings to the end of your contributory period makes little sense.
Will my CPP pension impact any other pensions I’m receiving?
Yes, if it’s a defined benefit plan and is integrated with the CPP. Check with your HR department to get the specifics on your plan.
Most DB pension plans are designed to provide you with a combined pension income – from both your plan and CPP – that equals approximately 1.5 to 2 per cent of your average salary multiplied by your years of credited service in the plan.
Each year, the CPP establishes a maximum amount of earnings on which to base your contributions (for example, in 2013 the maximum is $51,100).
Generally, while you're working, you contribute less to the plan on earnings below the CPP maximum, and more on that portion of your earnings above the CPP maximum.
If you retire before age 65, most plans offer a bridge benefit to essentially "top up" your early retirement pension until age 65.
However, when you turn 65 that pension is reduced to recognize what you’re now receiving from CPP. In rough terms, the reduction cancels out much of the CPP pension you would qualify to receive at 65.
Regardless of when you decide to actually take your CPP pension, your DB pension will be reduced at age 65. Consequently, many people in these circumstances opt to take CPP at 60.
What’s the impact of CPP on other government programs I’m receiving?
It varies. Income-tested benefits from programs such as War Veterans Allowances, Guaranteed Income Supplement, and the Allowance will certainly take your CPP pension into account.
This means that some low-income earners must consider the impact that starting or deferring their CPP pension will have, for instance, on the GIS – a monthly benefit paid to seniors with little or no additional income.
The maximum monthly GIS benefit for the first quarter of 2013 is $740, and the annual income threshold for 2012 is $16,560. Over this, however, the GIS is clawed back at 50 per cent or 50 cents on every dollar.
Is my CPP pension fully protected from inflation?
Yes. CPP pensions, including the new PRB, are adjusted annually to account for increases in the cost of living as measured by the Consumer Price Index — and that’s another possible advantage of waiting to collect your CPP pension.
This indexing provides you with a guaranteed boost in returns not available within an RRSP. And that difference will compound over time. The bigger your monthly cheques will be in the years to come, the greater the benefit of any future cost-of-living adjustments.
What happens to my CPP benefits if I die?
Survivor benefits are payable to a spouse or common law partner and children who are under 18 (or until age 25 if they’re still in school.)
The size of the monthly cheque your beneficiary collects depends on the CPP pension you’re already receiving, or would have received had you been 65 at the time of death, your beneficiary’s age when you die, and the amount of money he or she is already receiving in personal CPP benefits.
Your beneficiary would see a one-time lump sum death benefit of up to $2,500, plus a maximum monthly CPP pension, in 2013, of $557 (if they’re under 65); $608 (if they’re over 65); as well as $229 for each child.
Most survivors don’t see anywhere near that, however. The average survivor benefit is currently $312 for someone over 65 and $383 for those under 65.
Remember, as we discussed last week, there’s a cap on how much a surviving spouse can actually receive.
What happens if I’m single?
Unlike most DB pension plans, where if you’re single when you start receiving your pension your estate is generally entitled to at least 10 years of payments, the CPP offers no such relief.
With no partner or children, your CPP pension ceases upon your death. Your estate will get a one-time death benefit of up to $2,500 to help with your funeral. Everything else you contributed over the years will go towards other people's pensions.
Again, unless you expect to be very long lived, this is an argument for collecting early to ensure you get as much out of the plan as possible.
Contact Gordon here or continue the discussion on our Facebook page.
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