Should I take CPP Early?

In Canada, pension benefits, known as The Canada Pension Plan or CPP, start from age 60.

Some people may wonder if it is beneficial to start receiving the payments this early on, or if it is better to defer the CPP benefit for another few years?

In this post, we will talk about the pros and cons of you taking CPP early and help you decide on the right age to start collecting the CPP aids.

CPP Payments 2023

What is CPP?

The Canada Pension Plan (CPP) is a deferred income retirement vehicle. It provides a monthly, taxable CPP benefit to partially replace your income upon retirement, disability, or death. The CPP is available to almost every person who works or has worked anywhere in Canada, except Quebec.The latter has its own retirement pension plan (the Quebec Pension Plan) that provides basic financial protection to those who work there.

The amount of money you receive each month through CPP depends on three factors:

• Your average earnings throughout the working life

• How much you contributed toward you Canada Pension Plan (CPP)

• The age at which you started making those contributions

If you are eligible, you are guaranteed to receive CPP payments should you retire, become disabled, or pass away. That is because the monetary contributions you make to CPP can only be used for funding it and paying the monthly benefits when the time comes. It cannot be used for any other purpose.You receive a monthly payment for as long as you live. If you are married, your spouse is eligible to receive part of your retirement pension.

When can you start taking CPP?

The standard age for receiving the CPP retirement benefits is 65. However, you can choose to receive it as early as age 60. Alternately, you can delay CPP up to age 70. You receive a lower monthly benefit when you opt to receive your CPP before your 65th birthday. Conversely, when you delay it, you receive a larger amount every month.

You will not receive Canada Pension Plan payments automatically; instead, you must apply for it. You can apply online or by paper. If taking the former route, you need a My Service Canada Account (MSCA)and can expect a reply within 14 days. Those applying by paper may have to wait up to 120 days for the same.

Taking CPP early may seem like a good choice but you are missing out on some money in the long run. You can begin receiving CPP benefits one month after your 60th birthday. This results in a 36% permanent drop in your monthly payment, but it's still money in your pocket right now. What exactly is this? At the age of 65, the maximum CPP benefit is $15,043 per year (2023).

How much CPP will I get at 60?

If you decide to receive CPP early at age 60, you lose 36% of the CPP benefit permanently. The pension is reduced by 0.6% for every month before the 65th birthday you start receiving it — which amounts to 7.2% a year.

For 2021, the maximum amount you can receive in a year is $14,445.00 which comes to $1,203.75 a month. If you elect to take CPP at age 60, you will receive $770.4 a month.

That said, the average monthly CPP payment is far less than the maximum limit. Estimates suggest that the average pension payout is $706.57 a month. So, if we assume you qualify for the average payout, you are going to receive $452 a month if you collect CPP at age 60.

The perfect time to take CPP is different for everyone. Talking to an advisor can help guide you through the process.

If you take CPP early means a smaller monthly benefit, yet in some situations it might be the right decision. Here are the five main reasons why people collect CPP at age 60.

1.    You need the money

You do not have a steady stream of income or enough personal savings to carry you through until your 65th birthday? While you may end up collecting less over your lifetime, you have no choice but start collecting your Canada Pension Plan (CPP) to cover everyday living expenses. Simply put, your present financial need is too strong not to take it.

2.    Poor health

If you are considered to have a shorter life expectancy, whether due to underlying health problems or a poor family health history, you can look at taking CPP early.

In Canada, the average life expectancy is 80 for men and 84years for women. If you are playing the averages, starting CPP early is not a good idea. However, if your life expectancy is shorter than the average, the decision to take CPP early can make sense financially.

What you need to look at is the breakeven point for starting it early. For instance, if you expect to not live more than 69 years, the optimal age to take CPP is age 60. On the other hand, someone with a life expectancy of 85 years should start it when they turn 69.

3.    You did not work between age 55 and 60

Taking CPP early may make financial sense for those with an employment gap between the age 55 and 60.

4.    Avoid OAS pension recovery tax

If you think you may have to pay OAS pension recovery tax at 65, taking your CPP early may help you avoid it.

5.    Wrongly believing that CPP fund will not last

That CPP will go away is just a misconception, but unfortunately it is far more popular than it should be. Many people wrongly believe that the government will take the CPP money and use it for something else or the CPP is underfunded. As a result, they collect it early and take an avoidable loss.  

But the fact of the matter is CPP is here to stay, with the CPP 2019 actuarial court showing that CPP is sustainable for at least the next 75 years. Additionally, the government cannot use the CPP funds for any other purpose.

How much CPP will I get at age 70?

If you decide to receive CPP at age 70, your monthly benefit will be 42% higher than it would have been if you started it at age 65. The CPP pension is increased by 0.7% for every month after the 65th birthday you start receiving it — which amounts to 8.4% a year. So, if you were to receive $619.75 a month at age 65, the monthly benefit amount at age 70 would be $880.40.

However, just because you will receive a bigger monthly benefit if you delay CPP until age 70 does not automatically mean that is abetter strategy, because there are other factors to consider. All the same, deferring CPP benefits can be the right decision in certain situations. These include:

• Enhanced benefit‍

If you have a longer life expectancy and can financially afford to defer CPP benefits until age 70, you probably should. As said above, there is a strong incentive for delaying CPP past age 65. For each year you postpone taking CPP, you get 8.4% more (up to a maximum of 42%). Since there is no incentive for deferring CPP past age 70, that is the best age to apply for the benefits.

Let’s look at a quick example. The average CPP monthly payment is $741.21, which comes to $8,570 a year.

Let’s assume you decide to start CPP as early as possible —that is, at age 60. Since the yearly benefit amount will be slashed by 36%, you will receive $5,485. That is a loss of $3,085 per year.

Now, suppose you defer the benefits until your 70th birthday. You will get 42% more, which amounts to $12,169. In other words, each year you will receive $3,599 more than what you would have got had you started at age 65.

• You plan to work from age 65 to 70

If you are in a higher tax bracket and plan to work until70, deferring CPP aids can help save money.

Since CPP earnings are subject to income tax, starting them while you are employed full-time will increase your taxable income. Which means you will be paying more tax. But if you defer them until you have retired and moved into a lower tax bracket, you can keep more of the benefit.

• You have a longer life expectancy

If extreme old age (think 95 or 100) runs in your family, delayingCPP can help minimize your longevity risk.

What are the additional benefits of CPP?

Besides CPP retirement pension, you might be eligible for other benefits. These include:

Post-retirement benefit (PRB)

The PRB program allows Canadians who are over 60 and getting the CPP benefit but still employed and making Canada Pension Plan (CPP) contributions to receive additional benefits for their contributions.

Previously, once you start collecting CPP payments, you could no longer make further CPP allowances. Now:

• Canadians who are between age 60 and 65, receiving CPP retirement pension payments, and still employed must make CPP contributions

• Canadians who are between age 65 and 70, receiving CPP benefits, and still employed can choose to continue making CPP allowances or not.

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Disability pension

The disability pension is a monthly benefit paid to CPP contributors who are under 65, not yet receiving CPP retirement pension, and unable to work because of an injury or illness. You will receive the financial assistance for the duration of your disability or until age 65 (whichever is first). The disability pension benefits are subject to periodic review, the duration of which depends on the severity of your disability.

Post-retirement disability benefits

The CPP disability benefits program offers financial assistance to Canadians who:

• are under the age of 65

• are unable to work due to physical or mental disability

• have contributed to CPP either for a minimum of four years in the past six years or for a minimum of 25 years, including three of the last six years

The benefit is payable until the claimant turns 65.

Survivor’s pension

The benefit is paid to the spouse or the common-law partner of a deceased CPP contributor. The benefit amount depends on two factors:

• You rage (whether you are over or under 65)

• The size and duration of the CPP allowances made by the deceased

Children’s benefit

Children’s benefit is a financial assistance program fort he dependent children of a disabled or deceased CPP contributor.

There are two types of Children’s benefits:

• Surviving child’s benefit – The children of a deceased CPP contributor receive monthly payments if the latter has made enough CPP contributions.

• Disabled contributor’s child benefit – The children of a person receiving a CPP disability benefit receive monthly payments.

Death benefit

This is a one-time payment made to the estate of the deceased CPP contributor. The executor of the deceased’s estate needs to apply for the taking CPP death benefit within 60 days of the date of death. In case there is no estate, or the executor did not apply, the payment will be made to the individual or institution that covered the deceased’s funeral expenses, the surviving spouse or common-law partner, or the next of kin.

Things to consider before taking CPP

There is no one-size-fits-all answer to the question of when the right time is to start collecting CPP. It all depends on the following factors:

• Your financial situation

• Your health

• Your retirement plans

If you take CPP early, you will receive a smaller benefit amount every month. For every month after your 65th birthday, you will get 0.7% more. So, if you are in good shape and have a normal life expectancy, deferring CPP benefits might be a smart move. Likewise, those who have access to other sources of income might want to consider delaying CPP.

On the other hand, if you do not want to work after 60, you may opt to receive the benefits early. Similarly, if your health is waning, the extra cpp income can help you enjoy life to the fullest while you still can. TakingCPP early can delay having to dip into your lifetime’s savings, which means you will be able to pass on more of your wealth to your children and grandchildren.

What is right for me and applying for CPP?

The Canada Pension Plan is a valuable resource for retirees, and it’s important to understand when you should start collecting CPP benefits.

We hope this article has helped clear up some of the questions you may have about CPP.

Choosing when to start collecting CPP is anything but a simple decision. We are here to help you make the right choice. Dundas Life financial experts will analyze your family’s financial situation and help you get more out of your CPP.