Collect CPP early if you can

Before you turn 60, take a good look at your Canada Pension Plan options.  You may want to take a reduced monthly amount at age 60.  Or you may want to wait until 65 to have a full monthly payment.  Here are a few steps we review with clients who are torn between the ages of when to begin collecting.

To start the process you should request a current CPP statement  online at www.servicecanada.gc.ca or phone 1-800-277-9914 for general information.

This statement provides some information and estimates regarding what you are entitled to based on your past earnings.  The statement includes an estimate of your monthly CPP payment if you collect at age 60 versus age 65.

The formula for collecting CPP early (before age 65) involves a .5 per cent reduction for every month that you collect CPP before the age of 65.  The earliest you may begin collecting CPP is at age 60.  Collecting CPP at age 60 would result in a 30 per cent reduction, calculated by multiplying .5 by 60 months (5 years multiplied by 12 months).  This formula is a little too simple and doesn’t factor in a few important components that we will discuss below.

Before making a decision it is important to review the impact of low-earning years on the benefit formula.  Calculations are based on how much you have contributed and for how long.  If you do not work after the age of 59 and choose not to begin collecting CPP early then you will be adding years with 0 earnings.  If you add five years with 0 earnings then you should not expect to receive 30 per cent more by waiting.  If you plan on working, consider estimating your potential earnings between age 60 and 64 to assist you with making the decision to collect retirement CPP early.

One way to qualify for early CPP (between the ages of 60 and 64) is to earn less than the current monthly maximum CPP retirement pension payment in the month before your pension begins and in the month it begins.  Another way to qualify for early retirement CPP is to stop working.  The term stop working means that you are not working by the end of the month before the CPP retirement pension begins and during the month in which it begins. For example, if you want your pension to begin in September, you have to stop working by the end of August and you cannot work during the month of September.  You could begin working part time or full time after September and continue to collect CPP at the same time.

If you are in a position to stop working at age 60 for a period of time you may want to consider applying for CPP early.  One component that is often missed in the decision process is the ability to stop paying into CPP.  CPP began in 1966 and chances are you have paid into CPP for many years through small withholdings on each paycheque.  The amount paid in is based on your earnings up to a yearly maximum.  Self-employed individuals pay based on their net business income, after expenses.

On November 3, 2008 Canada Revenue Agency announced that the maximum pensionable earnings for 2009 will be $46,300 ($44,900 in 2007). Individuals who earn more than $46,300 in 2009 are not required or permitted to make additional contributions to CPP.  Individuals earning less than $3,500 annually do not need to contribute to CPP. The employee and employer contribution rates for 2009 will remain unchanged at 4.95 per cent.   This essentially means that you as an employee may have to pay up to the maximum of $2,291.85 in 2009 ($2,049.30 in 2008).  These contributions are generally withheld from your paycheque.

Let’s look at an example.  Jill is soon turning 60 years old.  This year her employment earnings are expected to be approximately $40,000. This figure is between the minimum contribution level of $3,500 and the maximum of $46,300 for pensionable earnings.  If Jill’s earnings are the same in 2009, then Jill will be required to make contributions to CPP of $1,806.75 calculated as follows: (40,000 – 3,500) x .0495.  If Jill were self-employed, her required contribution amount would be 9.9% or $3,960.

Important point:  One of the biggest benefits of collecting CPP early is that once you begin collecting CPP you are no longer required to remit CPP if you begin working again. This is especially important if you think you may work part time after age 59 and before age 65.

If you are already exempt from paying into CPP you should notify your employer to ensure they are not withholding a CPP portion from your pay cheque.  At the end of the year you should also double check to see if your employer has the CPP correctly stated on your T4.  Individuals who are not yet exempt from CPP may want to discuss with their employers a short term retirement period.  This would benefit the employer as well because they would not have to pay the employer portion of CPP.  If this can be coordinated during a slow period for the business then everyone wins.  More people are choosing this type of arrangement.  By working part time, after your one month retirement period, you may be in a lower tax bracket with no CPP withheld on each of your pay cheques.  In Jill’s case, she could save at least $1,806.75 each year by stopping work once for the period required by CPP.

The decision to collect CPP early is often dependent on whether you have stopped working or whether you can stop for a period of time to qualify.  Once you reach age 65 you automatically qualify regardless if you continue to work.  We like the idea of the government paying you money for five additional years.  This is certainly better than the alternative of having to continue to fund CPP.