If you have worked in Canada you will have contributed to the Canada Pension Plan (CPP). You have some control over when to take and how much of a CPP retirement pension you will receive when you reach age 60. This post summarizes what you need to know and do and provides links to more details.
This post is one in a series to help you decide when to take the CPP pension. Click on Download Zipped Excel Spreadsheets which all of these posts refer to and that you can customize for your situation. Because each person’s circumstances are different it is hoped that these posts and the spreadsheets help you make a decision. (The posts below will be adjusted later or replaced when the enhanced CPP, due to be implemented starting in 2019, has been fully documented by the government.)
|1. What is Involved||2. The Rules||3. Factors Involved|
|4. Analysis||5. Spreadsheets|
The following summarizes what each post contains and what you should check on to ensure you know what is involved.
The CPP Rules
There are a number of conditions that are applied when determining what your Canada Pension Plan (CPP) retirement pension will be. You should understand them before you consider at what age you should take the CPP. The following is a summary of what is in The Rules post.
CPP Overview – The first thing you should know is what the CPP provides. A good source is on the Government of Canada website which describes the CPP in a series of pages that start at Canada Pension Plan – Overview. The rules that are appropriate to this series of posts are in When To Take The CPP – The Rules.
Applying for the CPP Retirement Pension – You can only get an accurate value of your CPP retirement pension from the Government of Canada. You can apply for the pension online by using the link mentioned above or going directly to the Apply section. You can also apply using a paper form by using this link which provides access to Form ISP-1000.
Statement of Contributions – You should obtain your Statement of Contributions (SOC) so that you know what the government has on record. They will use the contributions to determine your retirement pension. This is the most important document you need as it determines how many years are used for your pension and what percent your contributions are relative to the maximum.
Contribution Period – The calculation of your CPP pension uses all years from age 18 to when you take the pension. At age 60 this is 42 years, at age 65 it is 47 and at age 60 it is 52. However, only a maximum of 39 years can be included in the calculation.
Drop-out and Replacement Provisions – Low-earning years can be dropped from the calculation for child-rearing years and up to 17% of the remaining years. If the included years are still above 39, some must be ignored and/or replaced by higher-earning years.
CPP Pension Plan Payments at Age 65 – The CPP retirement pension is stated as a maximum monthly amount at age 65. Do not expect to the receive the maximum unless you have worked for at least 39 years and always exceeded the Yearly Maximum Pensionable Earnings (YMPE) each year.
Taking the CPP at Different Ages – If the CPP retirement pension is taken at any age other than 65, it is adjusted by a percentage. Below 65 you receive a reduction of 0.6% per month (7.2% per year) and above that you receive an increase of 0.7% per month (8.4% per year).
Some of the other factors you need to consider are the break-even age, the impact of inflation, the impact of taxes and life expectancy. All of these have an effect on the age you work until and when you start taking the CPP pension. They are each illustrated by charts and tables in the Factors Involved post.
CPP Payments – The payments you receive at any age depends on when you take the pension and other conditions discussed in the Factors post. The chart below is an example that is generated by the spreadsheet. It includes inflation.
The Break-even Age – In Chart 2 above, notice that the delay lines are below the “If Taken At 60” line up to a certain age. This age is the break-even age. If you live to the break-even age, each year after that you will have accumulated more than if you took it at age 60.
Taking the CPP at 60 and Continuing to Work – If you are going to work after age 60, you have the option of taking the CPP pension at age 60. This causes the post-retirement benefit (PRB) to be automatically activated. At the end of each year, you will receive the PRB which is 1/40th or 2.5% of the maximum retirement amount times the age adjustment times the percent your contributions are to the maximum (YMPE). You must still contribute to the CPP and the number of years worked does not change from what it is at age 60.
Impact of Inflation – The CPP retirement pension increases each year by the increase in inflation for the previous year as explained on this Government of Canada page. Including inflation always reduces the break-even age. It also increases the cumulative return at any age after the break-even age.
Impact of Marginal Taxes – You must pay taxes on the CPP pension. When delaying the pension, applying the marginal rate to only the difference between the delayed payment and the payment if taken at age 60 will reduce only a portion of the delayed payment, leaving a smaller available amount that can then be used to determine a new break-even age. This will always increase the break-even age.
Survival Probability – Life expectancy and the probability for surviving to a given age are key factors in determining if you should delay taking the pension. Use the spreadsheet provided with the Life Expectancy and Survival Probability post to see how long the average person will live at various ages. The survival probability for ages used on the spreadsheet are included on the Options page.
The options for taking the CPP retirement pension are discussed in detail in the Analysis post and are as follows:
- 1. Stop working before or at age 60 and either take the pension at age 60 or delay up to age 70.
- 2. Stop working after age 60 and either take the pension when work stops or delay up to age 70 or use the Post-Retirement Benefit to take it before you stop working.
On the spreadsheet these options are broken down into 3 sub-options each which can have any ages that suit your circumstances. These options are compared in terms of yearly payments, break-even ages and cumulative payments for a specified future age, such as 85. Also included is the impact of inflation and marginal taxes. The survival probability for ages used on the spreadsheet are included on the Options page.
Two examples (Maximum and Child-rearing) are included to illustrate how to use the spreadsheets and the options to decide when to take the CPP pension. Here are three charts for the Maximum example for Option 1 which are explained in the Spreadsheets post.
The downloadable Excel spreadsheets are described in the Spreadsheets post. Details on what to enter and how to interpret each line are included.
The key section is “Statement of Contributions” where you can paste your Statement of Contributions data. It includes macros that will automatically fill in drop-outs so that none of the CPP rules are exceeded. Using the resulting calculations you can evaluate the yearly payments, the cumulative payments and the break-even ages for different ages.