My name is Mark Goodfield. Welcome to The Blunt Bean Counter ™, a blog that shares my thoughts on income taxes, finance and the psychology of money. I am a Chartered Professional Accountant and a partner with BDO. This blog is meant for everyone, but in particular for high net worth individuals and owners of private corporations. My posts are blunt, opinionated and even have a twist of humour/sarcasm. You've been warned. Please note the blog posts are time sensitive and subject to changes in legislation or law.

Monday, December 14, 2020

When should I start receiving my CPP?

People often ask: “When should I start my Canada Pension Plan ("CPP") retirement benefits?” Unfortunately, the answer is not necessarily black and white. Between government rules on CPP withdrawals and the many nuances of an individual’s life, planning when to start receiving CPP can get complicated quickly. While the program actually gives you a fair bit of control over when and how much CPP you receive, that control can leave your head spinning.

This week I invited Jason Claydon, a Winnipeg-based senior advisor in our Wealth Advisory Services at BDO, to share some of the issues and factors he considers with clients.
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By Jason Claydon

The regular age to start receiving CPP retirement benefits is 65, and the amount you receive is based on your contribution history to the CPP program. You can receive a Statement of Contributions from the government by logging into your My Service Canada account or requesting a copy by mail. This statement provides an estimate of your retirement benefit.

You can start receiving CPP benefits as early as age 60 or as late as age 70. The benefit is reduced by 0.6% for each month (7.2% per year) that you start receiving CPP prior to age 65. The maximum reduction is 36%, which happens if you start receiving CPP at age 60.

Conversely, if you delay the benefit past age 65, you receive an increase of 0.7% for each month you delay (8.4% per year). This can reach a maximum of a 42% increase in the benefit if you wait until you are 70.

Is there a formula that calculates when to start receiving CPP?


There are actuarial calculations to help you determine when to start CPP. For example, if two people have the exact same financial situation, one person starts receiving CPP at age 60, and the other person starts at age 65—it would take the individual starting at age 65 until at least age 74 to catch up in the total amount of benefits received. Various factors affect this “breakeven” age.

I should note that many people disregard the actuarial calculations and take CPP early or at 65 simply because they feel a “bird in the hand is worth two in the bush” when it comes to guessing their mortality.

In any case, it’s not just health that should guide your decision on when to start receiving CPP benefits. It’s also important to review your overall financial situation, other sources of retirement income, and your tax situation.

When to receive CPP: An example


Let’s look at John and Jane Smith as an example. They are small business owners, both 62 years old, and want to retire at age 63 with $72,000 per year ($6,000/month) of after-tax income. They have saved $1.2m in their RRSPs, have $80,000 in each of their TFSAs, and have a $750,000 investment account in their holding corporation. Jane is also receiving a $20,000/yr pension from a previous employer.

They have had some past health issues but consider themselves relatively healthy. However, John has a family history of premature death—both his parents died in their late 60s. Jane’s parents both lived into their late 80s.

They are no longer contributing to their RRSPs but want to know if they should continue to let their RRSPs grow and delay withdrawals to the calendar year in which they turn 72 or if they should start withdrawals earlier when they retire at age 63. They are concerned about taxes and the significant tax liability on their RRSPs, which could leave their estate with a hefty tax bill.

Options for John and Jane


John and Jane could defer CPP benefits to age 70 and instead replace that income by starting withdrawals from their RRSPs at age 63. They could each withdraw funds each year to help meet their retirement income objective while staying within the lower tax brackets. They might even consider additional RRSP withdrawal amounts (within the lower tax brackets) to fund their annual TFSA contributions in retirement.

By deferring their CPP past age 63, they would receive annual increases to their CPP benefits, as noted above.

What John and Jane did


John and Jane decided to defer their CPP benefits (for now) and will start RRSP withdrawals at age 63. They realize there is an opportunity cost of starting RRSP withdrawals earlier and not continuing to maximize their future growth, but managing the tax liability on their RRSPs through tax-efficient withdrawals at lower tax rates is important to them. Essentially, they want to pay a little more in taxes now to help reduce taxes later on.

They made this decision as part of a comprehensive financial plan to address their entire financial situation, including their other assets. This included gradually withdrawing assets from their corporation in retirement. They are financially independent with the amount of savings they have accumulated for their retirement. This factored into their decision to defer CPP, and they will review their decision on an annual basis.

They will also have to make a decision in three years when they turn age 65 on whether they want to start or defer Old Age Security (OAS) benefits. OAS benefits are eligible to be received at age 65, and similar to CPP benefits, OAS benefits can be deferred past age 65 at an annual increase of 7.2% up to age 70.

The answer to when to take CPP benefits (and Old Age Security for that matter) is not a clear black-and-white answer. Like John and Jane, you should consult with your advisor to review your overall financial situation, your financial priorities, and the various options available to you. And then monitor and review your situation on a regular basis with your advisor.

Jason Claydon is a senior advisor in BDO’s Wealth Advisory Services practice. He can be reached at 204-956-7200 or by email at jclaydon@bdo.ca.

The content on this blog has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The blog cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact BDO Canada LLP to discuss these matters in the context of your particular circumstances. BDO Canada LLP, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information on this blog or for any decision based on it.

Please note the blog posts are time sensitive and subject to changes in legislation.

BDO Canada LLP, a Canadian limited liability partnership, is a member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. BDO is the brand name for the BDO network and for each of the BDO Member Firms.

3 comments:

  1. A couple of questions:
    1) If I do not agree with Service Canada's determination of my CPP entitlement, can I formally object?
    2) If I commence taking CPP benefits, can I stop taking the benefits.

    Is there a process to accommodate these situations?

    ReplyDelete
  2. I am not a CPP expert, but see these two links to your questions, I think they answer your questions:

    https://stepstojustice.ca/questions/income-assistance/can-i-appeal-decision-about-my-cpp-retirement-pension

    https://www.canada.ca/en/services/benefits/publicpensions/cpp/cpp-benefit/after-apply.html

    ReplyDelete
  3. Must Consider overall financial situation, other sources of retirement income, and your tax situation. Great insights about CPP.

    ReplyDelete