Hello;
A key element of retirement income planning is the sources of retirement income, a major one of which is government benefits such as CPP. The importance of CPP retirement benefits will range from trivial to significant. To get handle on CPP, here are a few central questions answered about CPP. 1 (Investment Executive Nov. 2017)
What is the best age to begin receiving a CPP retirement pension?
Some people believe that you should always take it as early as possible – age 60; others believe equally strongly that you should delay as long as possible – age 70. The answer depends on two main factors – life expectancy and other sources of income. As far as life expectancy is concerned, if you suspect you will have a shorter than average lifespan, you should take your CPP pension as early as possible; vice versa if you suspect you will have a longer than average life expectancy. Depending on when other income streams start or end, you may want to take your CPP early or late to avoid high income-tax brackets.
Is the amount of your CPP based on your best 5 years of employment earnings?
No. In fact, it’s “normally” based on your best 39 years. The only reference to a 5-year period under the CPP legislation is that the amount of your CPP is influenced by the average year’s maximum pensionable earnings (YMPE) for the 5yr period ending with the year that your pension starts. This is true whether or not you actually had earnings during any or all of those 5 years.
If you stop working at age 57 and you want to begin receiving your CPP retirement pension at age 65, will 8 years of zero earnings affect the amount of your CPP payment?
The short answer is “maybe.” As the amount of CPP you receive is normally based upon your best 39 years of earnings – in proportion to the YMPE for each year – the 8 years of zero earnings between age 57 and 65 may not affect you at all if you already have 39 years of solid earnings by the time you turn age 57. This is because at age 65, the general 17% dropout allows you to drop out your lowest 8 years of earnings – in proportion to the YMPE. If you already have 8 years of low earnings when you turn age 57, adding 8 more years of zero earnings could reduce the amount of your “calculated retirement pension” by approximately 10%. This will partly offset the increase that you will receive as a result of the age-adjustment factor. This situation is referred to as “receiving a larger slice of a smaller pie.” But you’ll always get more pie by waiting to take your CPP.
What is meant by the “age-adjustment factor” for CPP?
The “normal” age for starting your CPP is 65, but you can take it as early as age 60 at a reduced rate or as late as age 70 at an increased rate. The age-adjustment factor means that the amount of your CPP retirement pension will be reduced by 0.6% for every month that you start it before age 65- with a maximum reduction of 36% at age 60. It will be increased by 0.7% for every month that you begin receiving it after age 65 – with a maximum increase of 42% at age 70.
Is it true that you can stop contributing to CPP when you turn age 65, even if you continue working until age 70?
This is only true if you are receiving your CPP retirement pension. In that case, you can opt out making any contributions after age 65 by completing CRA form CPT30, or you can continue contributing to CPP and earn additional post-retirement benefits.
What does the CPP statement of contributions means when it says, “You could receive X if you were age 65 today?”
This means that the amount of your CPP retirement pension will be that amount if you continue to have earnings until age 65 at the same rate, relative to the YMPE, as your current “average lifetime earnings” – and considering the general 17% dropout has already been applied up to your current age.
Please let us know if you require additional information.
Sincerely,
Mike Busby (21-Apr-2021)
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