Special Feature

Special Report on Retirement 2017

In this special feature: keeping clients calm; downsizing the family home; getting the most from spousal RRSPs and much more from the Mid-November 2017 issue of Investment Executive.

Many clients rely on the Canada Pension Plan to form at least part of their guaranteed retirement income. But deciding when to take the benefit, as well as several other issues, can be vexing. An expert provides some of the answers

By Doug Runchey | Mid-November 2017

Doug Runchey founded DR Pensions Consulting, which provides its clients — including financial advisors — with expert advice on using the Canada Pension Plan (CPP). This includes calculations for future benefits and credit-splitting actions. Runchey was a manager in the federal government's income security programs department for more than three decades. Here, he answers a series of topical questions dealing with using the CPP as part of a retirement income plan.

Question: How much is one year of maximum CPP contributions worth toward a CPP retirement pension?

Answer: The answer to this question changes each year, and it can also be affected by other factors. For a retirement pension starting in 2017, one year of maximum contributions would be worth $28.57 per month if:

You have 39 or fewer years of contributions;

you take the CPP at age 65;

you never took any time off work to raise children under the age 7;

you have not received a CPP disability pension.

Once you have more than 39 years of contributions, or if you take the CPP before age 65, the value of each year of maximum contributions decreases. It could be as little as zero.

If you take the CPP after age 65 or took time off work to raise children or because you were disabled, the value increases.

Q: What is the best age to begin receiving a CPP retirement pension?

A: Some people believe strongly that you should always take it as early as possible - age 60; others believe equally strongly that you should delay as long possible - age 70. I believe that the answer depends on two main factors - life expectancy and other income sources.

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. As far as other income sources, if you know that you will be eligible for the guaranteed income supplement at age 65 or that you may be subject to the old-age security (OAS) clawback, then taking your CPP early may be advisable in order to reduce the monthly amount. On the other hand, if few of your other income sources are indexed to inflation, you may want to delay taking your CPP as long as possible to maximize your fully indexed CPP amount. 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.

Q: What is meant by the "age-adjustment factor" for CPP?

A: 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.

Q: Is the amount of your CPP based on your best five years of employment earnings?

A: No, the amount of your CPP is definitely not based on your best five years. In fact, it's "normally" based on your best 39 years. The only reference to a five-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 five-year 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 five years.

Q: If you stop working at age 57 and you want to begin receiving your CPP retirement pension at age 65, will the eight years of zero earnings affect the amount of your CPP payment?

A: The short answer is "maybe." As the amount of CPP you receive is normally based on your best 39 years of earnings - in proportion to the YMPE for each year - the eight 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 eight years of earnings - in proportion to the YMPE.

If you already have eight years of low earnings when you turn age 57, adding eight 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. I refer to this situation as "receiving a larger slice of a smaller pie." But you'll always get more pie by waiting to take your CPP.

Q: Does your decision about when to begin receiving your CPP affect the amount of survivor's pension that your spouse will receive after your death?

A: The short answer is "no"; but the longer answer is "maybe" - but not in the way you might expect. First, the amount of any survivor's pension that your spouse receives will be based on your "calculated retirement pension," which is before any age-adjustment factor is applied. This means that taking the CPP at a reduced rate before age 65 will not directly reduce the amount of the survivor's pension, and taking it at an increased rate after age 65 will not directly increase the amount of your survivor's pension.

Q: Is it true that you can stop contributing to CPP when you turn age 65, even if you continue working until age 70?

A: This is true only if you are receiving your CPP retirement pension. In that case, you can opt out of making any contributions after age 65 by completing Canada Revenue Agency Form CPT30, or you can continue contributing to CPP and earn additional post-retirement benefits.

Q: What are post-retirement benefits (PRB)?

A: PRBs are benefits paid for any CPP contributions made after you've already begun to receive your regular CPP retirement pension. These additional contributions won't affect the amount of your regular CPP retirement pension - and they won't be used for the calculation of survivor's benefits - but each year of such additional contributions will create a monthly PRB that begins effective January of the year following the contribution. The amount of the PRB will depend on the amount of your earnings - in proportion to the YMPE - and your age as of that following January. For someone who is age 65 and has earnings at or above the YMPE, the monthly amount of the subsequent PRB would be $27.85. This amount is added to your regular CPP retirement benefit and is paid for life.

Q: What does the CPP statement of contributions mean when it says, "You could receive X if you were age 65 today?"

A: 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 that has already been applied up to your current age.

Q: How will the "enhanced CPP" changes affect someone who is aged 50 today?

A: The enhanced CPP changes begin to affect pensions that begin in 2019 or later, but no one will receive the new 33.33 % income replacement of the new higher year's additional maximum pensionable earnings until 2065.

For people who are age 50 today, the greatest increase that they could receive in their retirement pension at age 65 is approximately $152.50 a month. That pushes the current monthly maximum of $1,114.17 to $1,266.67. This translates to a 13.7 % increase compared with the approximately 52 % increase that someone who's currently age 18 could receive.

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