Depending on a client’s circumstances, pursuing a strategy of deferring the Canada Pension Plan (CPP) benefits, and even old-age security (OAS), until age 70 may make sense. Waiting until then to begin collecting one or both of those benefits will allow your clients to boost their payouts significantly, providing them with a guaranteed stream of income that will serve as a kind of insurance against longevity risk.
“One of the reasons people are anxious these days about retirement is the relative lack of defined pension benefits,” says Fred Vettese, chief actuary with Morneau Shepell Inc. in Toronto. Boosting CPP and OAS payouts by waiting until age 70 may mean “less uncertainty, less anxiety [for your clients] in the long run,” he says.
Canadians can apply for their full CPP benefits at age 65, but have the option to begin collecting the benefits as early as age 60, at a reduced rate, or as late as age 70, at a higher rate. For every month after age 65 that an individual waits to begin collecting CPP, the payout amount rises by 0.7%. Thus, if your client waits until age 70, he or she will receive a payout amount that’s 42% higher than the amount he or she would receive if benefits had begun at 65.
For example, a retiree collecting CPP at age 65 this year can receive a maximum monthly amount of $1,092. By waiting until age 70, the same retiree can collect a payout of slightly more than $1,550 a month (not including indexation).
The receipt of OAS benefits also can be delayed until after age 65, but can’t be collected earlier than that age. If OAS benefits are deferred to age 70, the OAS payout rises by 36%. For 2016, the OAS payout at age 65 is about $570 a month, but would be about $775 a month at 70.
Waiting until 70 to begin collecting pension benefits won’t be the right move for everyone. According to Employment and Social Development Canada, which administers the CPP and OAS, only 0.6% of new retirees receiving CPP benefits in 2015 were 70 or older. (The rules allowing for OAS deferral were introduced in 2013, so statistics won’t be available on deferral until 2018.)
Individuals who opt to defer benefits until 70 should be in good health and expect to live a long life.
“If you have a medical situation, taking CPP and OAS as soon as you can may be a good idea, regardless of what happens later,” says Adrian Mastracci, president of Vancouver-based KCM Wealth Management Inc.
Clients who choose to defer CPP and OAS benefits until age 70 also will need to have alternative sources of income from investments, employment or savings to cover their living expenses between the ages of 65 and 70.
Deferring CPP until 70 can present an opportunity for a client to draw down strategically from an RRSP, thereby lowering the amounts the client will have to take out after converting the RRSP to a RRIF at age 71.
“When you begin receiving your boosted government benefits at 70, depending on what other forms of income you might have, you risk pushing closer to the OAS clawback level,” says Matthew Ardrey, vice president and wealth advisor at Toronto-based TriDelta Financial Partners Inc. “One of the things I talk to my clients about is doing an RRSP meltdown – taking money out of their plan – particularly if they’re in a lower tax bracket.”
Another benefit of drawing down on savings and other pension amounts, such as from a life income fund, while deferring CPP and OAS benefits, is that doing so shifts part of the client’s investment risk of funding retirement away from the individual and to the government, Vettese says: “You’re less exposed to vicissitudes of the market, because you’re drawing down a greater portion of your savings over the next five years.”
Some clients considering a strategy of deferral may express reservations that the government benefits might not be available if they wait until age 70. Those fears are unfounded, Vettese says: “With the CPP, especially, it’s paid into by employers and employees, so you can’t just make up the rules.”
Fewer clients are open to the idea of deferring the OAS than CPP benefits. The OAS benefit is a smaller amount relative to CPP, and doesn’t receive as great a boost when deferred until age 70. “People are just hard-wired in their brains, to say, ‘Yeah, I’m going to take [the OAS] at 65’,” Ardrey says.
Some clients also may be concerned about the prospect of dying before 70 or soon thereafter, thereby missing out on all the CPP benefits they could have collected; a client who defers taking CPP until 70 will have to live to about age 81 before he or she breaks even with a person who chose to take the benefits at age 65.
Clients tend to underestimate both how long they’ll live and the degree to which an increased CPP or OAS payout amount can protect them from outliving their money.
But no client will know the exact right time to take CPP or OAS. “You’re never going to be totally accurate,” Mastracci says. “You give [the estimate] your best shot.”
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