Making the Most of CPP: When is the right time to start your pension?
November 21, 2024
While there is flexibility, it’s important to remember the age you choose to start will greatly impact the amount you receive each month.
Chris Hanley, CA, CPA, CFP® and Denika Heaton, BBA, JD, TEP
Mawer Tax and Estate Planning Specialists
After contributing to the Canada Pension Plan (CPP) throughout your working years, you may be wondering when it makes sense to start receiving your CPP benefits. While there is flexibility—you can take CPP as early as age 60 or as late as 70—it’s important to remember the age you choose to start will greatly impact the amount you receive each month.
How CPP Benefits Are Calculated1
First, it's important to understand the basics of how your CPP retirement pension is calculated.
➤ Your CPP amount factors in your total contributions and average earnings over your working years, which is considered from age 18 until you choose to take CPP.
For example: If you are applying for CPP at age 60, your contributory period would be 42 years. At 65, it would be 47 years.
➤ Then, adjustments are made to “drop out” certain periods of lower earnings from the calculation, such as:
- periods when your children were under the age of 7
- periods you received CPP disability payments
- a general “drop out” of 17% of your lowest earning periods
For example: If you aren’t eligible for the child “drop out” and never claimed CPP disability, then a general “drop out” would apply, and your CPP pension would be based on either 35 years (at age 60) or 39 years (at age 65) of your highest earnings.
➤ Lastly, an age adjustment is applied, which is based on how old you are when you begin taking CPP. I.e., if you start before age 65 or after.
For example: If you take your CPP pension before 65, the payments will be lower, whereas after 65, they will be higher.
Note: If you work and contributed to the CPP in 2019–onwards, you may have noticed your contribution rate increased. This is part of a gradual, overall enhancement to the Canadian Pension Plan, which will result in additional benefits (still, depending on your age when you start taking your pension).
1 There are a range of situations that can affect your pension amount. The CPP also provides supplementary benefits including disability, survivor, and a death benefit. More information can be found on the Government of Canada’s website. Please consult with your Investment Counsellor.
How Your CPP Is Affected By The Age Adjustment
Taking CPP early (before age 65)
You can choose to start receiving your CPP retirement pension as early as age 60, but your benefits will be permanently reduced.
➤ If you start receiving CPP before age 65, your pension will be reduced by 0.6% for each month before age 65, up to a maximum reduction of 36% if you start at age 60.
This means that if you start your CPP payments at age 60, your monthly benefit will be 36% less than if you had waited until age 65.
That said, taking your CPP payments before age 65 also reduces the number of contributory years considered in the pension calculation. If you’ve retired and have zero earnings between ages 60–65, taking your CPP pension early may partially offset the overall reduction you experience because those no-earnings years won’t be considered in the pension calculation.
Taking CPP at age 65
Age 65 is considered the "standard" age to start receiving CPP benefits. If you start your CPP retirement pension at age 65, you will receive the full amount you are entitled to based on your contributions and any dropout entitlements.
Delaying CPP (after age 65)
You can also choose to delay receiving your CPP retirement pension until after age 65, up to age 70.
➤ If you delay taking CPP, your pension will be increased by 0.7% for each month after age 65 that you delay, up to a maximum increase of 42% if you start at age 70.
This means that if you delay your CPP payments until age 70, your monthly benefit will be 42% more than if you had started at age 65. There is no further increase from delaying past age 70.
The good news is, if you aren’t working between age 65–70, those no-earnings years will not reduce your CPP pension, as they can be dropped out of the CPP pension calculation.
Life Factors To Consider
There are several life factors to consider while deciding when to start receiving your CPP retirement pension:
Financial need: If you need the income to supplement other sources and cover your lifestyle expenses, starting CPP benefits earlier may be necessary.
Health and longevity: Consider your health and family history. If you expect to live longer, delaying CPP retirement income may result in higher total benefits over your lifetime. Individuals experiencing an illness or with shortened life expectancy may benefit from taking CPP payments early.
Whether you are working: If you are under age 65 and decide to begin your CPP benefits early while working, you and your employer are both required to continue contributing to CPP. If you are between ages 65–70, you may choose whether to continue to contribute. The additional contributions will go towards an additional CPP post-retirement benefit, increasing your total CPP pension. This can increase your CPP pension even if you were already receiving the maximum CPP pension.
Income taxes and OAS clawback: The amount of CPP pension you receive is an important consideration, but so is the amount of the CPP pension that you keep after income taxes and OAS recovery taxes (also known as “OAS clawback”). You should consider your expected marginal income tax rate and the expected OAS clawback, if any, resulting from the timing of your CPP pension.
Other sources of income: If you have other sources of retirement income such as a pension from your employer or savings, you may be able to delay your CPP income and receive higher benefits later.
Deciding when to start your CPP retirement pension is a decision that depends on your individual circumstances, and there are more factors to consider than one might think. Our Investment Counsellors can assist you with making an informed choice that best aligns with your overall financial goals.
Disclaimers:
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Mawer Investment Management Ltd. provides this publication for informational purposes only and it is not and should not be construed as professional advice. The information contained in this publication is based on material believed to be reliable at the time of publication and Mawer Investment Management Ltd. cannot guarantee that the information is accurate or complete. Individuals should contact their account representative for professional advice regarding their personal circumstances and/or financial position. This publication does not address tax or trust and estate considerations that may be applicable to an individual’s particular situation. The comments are general in nature and professional advice regarding an individual’s particular tax position should be obtained in respect of any person’s specific circumstances.
