The Canada Pension Plan:  Decisions, Decisions…

“When should I take my Canada Pension Plan?” is another one of those very commonly asked questions that I get. And the answer will probably surprise you. Obviously, it varies person to person, depending very heavily on one’s tax and health situation. If only we knew how much longer we had to live, it would make that decision so much clearer. Methuselah certainly would have been much, much better off waiting until age 70 and collecting 42% more for his remaining 899 years, but most of us can’t expect to live quite that long.

A recent paper by the Canadian Institute of Actuaries (yes – that is the CIA), shed a significant light on what decision most people should make. 

How the Canada Pension Plan (CPP) Works

Each year your employer takes up to $2,898 off of your paycheque. They then contribute another $2,898 and send the whole amount to the federal government to be placed in a trust that is invested on behalf of all CPP participants. This money is then used to fund existing claimants and the remainder is invested with the CPP Investment Board for future claimants. At the time of writing it is believed that the CPP is actuarily sound. In other words, it’s not like the old days where any excess just went into general revenues. In fact, it’s a good bet that CPP will be there for you.    

The amount that a claimant receives is based on a complicated set of rules and formulas, but generally heavily weighted to how much has been contributed over the previous 40 years. The maximum monthly pension that a person age 65 can receive is $1,175.83. One key item to note is that CPP is indexed to inflation. That’s not typically particularly noticeable in any given year, but over 20 years (assuming 2% annual inflation) it’s likely to amount to a 1/3 drop in purchasing power. Trust me – that you will notice. 

Claimants have options. The vast majority of individuals take CPP at the “normal” retirement age of 65, but you may… 

• take it as early as 60 (with a 0.6% per month penalty) or 
• as late as 70 (with a 0.7% per month reward). 

If you knew that you wouldn’t live past 62, then of course you should take it at 60. Similarly, if you are in a zero tax bracket at age 60, but know that by age 63 you will be in such a high tax bracket that more than half of your income will be taken away in the form of taxes, then that’s a pretty strong argument in favour of taking it as early as you can. There can be one other reason to take it early: you just need it. You can’t get work and don’t have any other means. 

I would argue that while all three of the above scenarios do occur from time to time, they are a rarity. In the vast majority of cases, we don’t know how long we will live, our tax brackets over time change, but not that much (and usually downward), and we’re not in dire straits financially. That’s where the CIA report comes in. Their findings are that “the majority of seniors with sufficient RRSP/RRIF savings would be better off delaying their CPP payments”. And when they say delay, they mean waiting until the age of 70 when you can collect the highest amount.

Ultimately though, before deciding on when to take CPP (and OAS for that matter), I would very strongly suggest that you talk to your financial planner. Get advice for your specific situation. No matter how well they know you, don’t assume that your advisor knows what longevity in your family is like. Talk to them about it. It’s important also to give them as much information as possible, understanding that we’re dealing with many unknowns. By giving them as much information as possible, especially regarding your expected future tax situation and life expectancy, they can help you navigate the best possible option tailored to your specific circumstances.

Arnold Machel, CFP® lives, works and worships in the White Rock/South Surrey area where he attends Gracepoint Community Church.  He is a Certified Financial Planner with IPC Investment Corporation and Visionvest Financial Planning & Services.  Questions and comments can be directed to him at dr.rrsp@visionvest.ca or through his website at www.visionvest.ca.  Please note that all comments are of a general nature and should not be relied upon as individual advice.  The views and opinions expressed in this commentary are those of Arnold Machel and may not necessarily reflect those of IPC Investment Corporation.   While every attempt is made to ensure accuracy, facts and figures are not guaranteed.