The CPP Retirement Pension – When Should You Apply?

The Canada Pension Plan (CPP) Retirement Pension is a taxable, inflation-protected public retirement benefit for wage earners. The normal age for the CPP Retirement Pension is age 65, for which the maximum benefit in 2012 is $986.67 per month. For a more complete description of CPP, take a look at our article "Understanding Changes to the Canada Pension Plan". You may apply to start receiving a reduced benefit as early as age 60.

As you approach age 60, you may be considering when to apply to start receiving the CPP Retirement Pension. Like most other financial planning questions, the best time for starting the CPP Retirement Pension will depend on your individual needs and circumstances. No single answer to this question can apply to everyone, but it can help you to consider the following questions.

Do you need the money?
If your income from other sources such as employment pension, withdrawals from savings, a spouse’s earned income, etc. is not expected to cover your basic needs, then you may need the CPP Retirement Pension as soon as possible. This consideration will tend to override any concerns about the pension being reduced if taken before your 65th birthday. Without this income, you may deplete your savings prematurely, which in many cases can have a greater impact on your financial security than accepting the reduced CPP income.

If you don’t need it, how might you use it?
You may not need income from CPP to cover your basic needs, but you may still have good uses for it. For example, you could use it to fund extra lifestyle expenses above your basic needs without having to dip into savings, thus preserving their value for other needs. You could contribute to a Tax Free Savings Account, which can help you accumulate significant tax-free assets to provide for future income or estate planning needs. You may have more personal, non-financial reasons to start it sooner rather than later. For example, many people express an interest in using the pension while they are at the peak of their health and activity levels, during the early years of retirement.

How much will you receive?
Your "baseline" age-65 pension, up to the $986.67 monthly maximum, is determined by your average annual contributions while you were working. It is adjusted if you start to receive the pension in a month other than that of your 65th birthday. These adjustments are changing based on the year you start to receive the pension, as illustrated in the following table:

This means that if you are 60 years old in 2012 and you start receiving the pension this year, your “baseline” age-65 entitlement will be reduced by 31.2% (0.52% x 30 months). If you had qualified for the full $986.67 at age 65, your age-60 monthly pension would start at $678.83. Similarly, your pension will be increased if you wait until after your 65th birthday to start. If you start at age 70, the increase could be as much as 42%. There are two factors that will be affected by the timing of your decision: the changes in adjustment rates each year until 2016 and the adjustments themselves. Although they are important to consider, in most cases they would not be enough to alter your lifestyle significantly.

How much will it be taxed?
Finally, you should consider your tax position in the years in which you are considering adding this income. A relatively high tax bracket means a lower after-tax income from the CPP Retirement Pension. It may be prudent to start the pension when you expect a lower income tax bracket. You may also be able to split some or all of your CPP Retirement Pension with your spouse or common-law partner. This can significantly reduce the income tax on your pension.

Find Out More As you approach age 60, you should obtain a Canada Pension Plan (CPP) Statement of Contributions from Service Canada by visiting www.servicecanada.gc.ca or calling 1 800 277 9914. This document will describe your contributions and expected income from CPP benefits including the Retirement Pension. You should review this information in a retirement planning discussion with a Certified Financial Planner. By planning ahead and knowing your options, you can save yourself much of the worry and stress involved in this important transition.