Sooner or later? When to start CPP

National Post


New rules calculating payments can alter your tax bracket

The recent proposed changes to the Canada Pension Plan have once again renewed the debate about whether CPP should be taken early (prior to age 65) or delayed as late as age 70.

The amount of CPP benefits you can receive are based on the number of years you worked and contributed, as well as your salary. This year's maximum CPP benefit is $10,905.

The CPP is designed primarily to provide working Canadians with a pension equal to about 25% of their pre-retirement income, up to a maximum amount ($46, 300 in 2009). Note that the maximum amount is not the payout in a year, but the wage on which it is computed.

In May, the government announced several changes, including the removal of the "work cessation test" and a change in the calculation of benefits if CPP is taken early or late.

It's important to evaluate these changes from a tax point of view as taking CPP while you are still working has the potential to put you into a higher tax bracket, increasing your tax burden beyond the benefits of taking early CPP.

Similarly, taking CPP late, at the new higher adjusted amounts, could not only put you in a higher tax bracket in those years, but could also affect the amount of Old Age Security you receive, which is subject to clawback at higher income levels.

The work cessation test currently requires anyone wishing to take their CPP benefit early (as early as age 60) to basically stop working for at least two months. The government announced that, beginning in 2012, the work cessation test would be removed, allowing Canadians to begin collecting CPP as early as age 60 without having to stop working.

The other big change affects the calculation of benefits when CPP is taken early (before age 65) or late (as late as age 70). There has always been an actuarial adjustment to the basic amount that you are entitled to receive at age 65 should you choose to collect CPP early or late.

In the case of someone taking early CPP, this adjustment is meant to reflect the fact that contributions to CPP have been made for fewer years and CPP benefits would be received over a longer period of time. The opposite holds true if you take CPP late.

The adjustments now in place reduce the early CPP benefit by 0.5% per month for each month that CPP is taken before age 65. For example, if you take CPP at age 60, your CPP benefits would be reduced by 30% (60 months X 0.5%/month). Conversely, choosing to take CPP late will increase your CPP benefits by 0.5% per month, to a maximum of 30% at age 70.

But these adjustments, calculated in 1987, are being changed to restore them to their "actuarially fair levels." The early pension reduction will amount to 0.6% per month for each month CPP is taken early and an extra 0.7% per month for each month CPP is taken late. Both adjustments will be phased in gradually starting in 2012 and 2011 respectively.