Recent changes to the Canada Pension Plan (CPP) and Old Age Security (OAS) are giving Canadians the option to decide when to take the benefits from these programs, which could impact their retirement income and the tax they pay.
Beginning in 2012, anyone who paid into CPP and reached the age of 60 could choose to begin receiving CPP benefits regardless of employment status. Previously, in order to qualify for retirement benefits one had to cease employment.
Under the old rules, CPP benefits were reduced by 0.5% for every month that an individual collected benefits prior to 65 and were increased by the same amount for each month after 65 up to age 70.
This meant someone who began collecting at age 60 received 30 per cent less than they would have had they waited until age 65 and 30 per cent more if they waited until 70.
Under the new rules, this monthly penalty for taking the CPP early will increase gradually from 0.5 per cent in 2012 to 0.6 per cent a month by 2016 and the monthly benefit for delaying CPP increased from 0.5 per cent a month to 0.7 per cent a month in 2013.
Taking CPP early at 60 will mean you will receive 36 per cent less than if you take it at 65 and you’ll get 42 per cent more if you start taking it at 70 instead of 65.
The maximum CPP payment for 2014 is $1,038.33, or 12,459.96 a year.
Effective July 1 last year, the federal government permitted people who turn 65 to delay the start of their OAS pension until 70.
The current maximum OAS payment is $551.54 a month. By delaying it five years, monthly payments can increase by 36 per cent.
Deciding when to take CPP and OAS benefits is best based on each individual’s circumstances, but there are a number of factors to consider.
One has to do with the OAS claw back provision which stipulates that every dollar earned over a threshold ($71,592 in 2014) is clawed back by 15 per cent by the government. You won’t receive any OAS if you earn more than $115,716. If you have substantial income after 65 that will reduce substantially after 70 it may make sense to delay OAS until 70 to minimize the claw back.
Another consideration is your life expectancy and what is known as the cross over date. This is the age you need to attain to get the benefit of delaying receiving the benefits to get the larger amount.
For example, if you delayed taking CPP at 65 and took the enhanced benefit at 70, the cross over age is 80.2 years.
If you invested your CPP benefit when you received it and earned three per cent after tax, the cross over date rises to 83 years.
If you delay receiving OAS till 70 and the OAS payments are indexed at two per cent a year, the cross over is 78.67 years.
“Once people see the cross over date longevity becomes a factor in their decision,” says Dave Ablett, director of tax and retirement planning with Investors Group in Winnipeg.
“If you’re in good health and longevity is in your family, it may be a good idea to delay because you may have a better chance of reaching that cross over age.”
On the other hand, if you need the cash benefit or are in questionable health it may make sense to begin receiving reduced early benefits and take the after-tax proceeds and invest them in a Tax Free Savings Account.
A recent BMO Financial Group survey found that almost 90 per cent of Canadians plan to rely on the CPP/ Quebec Pension Plan to cover costs in retirement and almost 31 per cent plan to rely “heavily” on the plans, even though the average monthly payout is less than $600.
Financial experts advise that people should only consider government assistance programs like the CPP and OAS as supplementary sources of retirement income.
“Given the amount that the CPP or QPP pays out, Canadians should not rely on them as a primary source of income to fund their retirement,” says Chris Buttigieg, senior manager, wealth planning strategy with BMO Financial Group. “Rather, they should consider (them) to be a supplementary component of their overall retirement income solution and focus on creating their very own personal pension plan by contributing to an RRSP on a regular basis.”
Talbot Boggs is a Toronto-based business communications professional who has worked with national news organizations, magazines and corporations in the finance, retail, manufacturing and other industrial sectors.
Copyright 2014 Talbot Boggs