New Options Under The CPP Rules
New rules that are being phased in between now and 2016 for the Canada Pension Plan (CPP) will give people greater flexibility to choose when they want to begin receiving CPP benefits and on how long they can contribute to CPP after age 60.
Consider, for example, a 60-year-old worker who needs the income of a full-time job but would prefer to work fewer hours in order to take care of an ailing relative. The new rules make it easier for that person to receive their CPP benefits before age 65, which can be used to supplement their reduced income resulting from decreased hours of work.
But while the new rules offer more choices, many additional factors need to be considered in order to make those choices, cautions Chartered Accountant Michelle Connolly, Regional Vice President, Wealth Planning with CI Private Counsel LP in Toronto.
“As with any choice, there are trade-offs involved,” Connolly says. “For example, while it will be easier under the new rules to qualify to receive CPP benefits before age 65, the financial penalty for doing so will be greater. Currently, the benefit amount people receive at age 60 is 30 per cent less than it would have been if the person waited until age 65 to start receiving benefits. By 2016, that penalty will be greater – it will be 36 per cent less.”
On the other hand, people also have the option of deferring the receipt of CPP benefits until as late as age 70, in which case they receive higher benefits than they would have at age 60. Under the new rules, the amount of those extra benefits will also increase, from an additional 30 per cent in 2011 to 42 per cent in 2013.
People already receiving CPP benefits won’t be affected by the new rules - everyone else will have more choice. While each person should be guided by their own preferences and circumstances, Connolly recommends that people consider the following factors:
- Events that dictate actions - While everyone prefers to control their own choices, sometimes events occur that limit those choices or make them for us. For example, if you lose your job after age 60 (and do not expect to become re-employed), or you are unable to continue working for health reasons, you may need the income from CPP benefits before you are 65.
- Family and lifestyle circumstances - When deciding whether it is financially feasible to either stop working or reduce your working hours for family reasons (such as caring for grandchildren or acting as a caregiver for an infirm relative), factor in the costs that you would otherwise have to pay for daycare or other alternative care services, as well as any tax relief that may be available through deductions or credits. If the amount you save in out-of-pocket costs combined with the amount of your CPP benefits is close to the amount of employment income you will lose, you may decide that receiving CPP benefits before age 65 suits your financial circumstances.
- Employment and other income - Although you may begin receiving CPP benefits as early as age 60 even if you continue working, it’s important to consider the new “working beneficiary” obligations and income tax implications. On the positive side, these additional contributions can create additional benefits under the new Post Retirement Benefit. Starting in 2012, people under age 65 who collect CPP benefits while continuing to work will still be required to make CPP contributions. However, the CPP benefit will be taxable as income along with your existing employment and/or other income, and may result in a higher marginal tax rate and, therefore, a higher income tax liability. If so, any financial gain you may have triggered by receiving CPP benefits may be diminished.
- Anticipated sources of retirement income - CPP benefits are an essential component of most people’s anticipated retirement income. If, however, you expect to have few other sources of retirement income and you are still able to work, you may want to defer receiving CPP benefits until as late as possible in order to maximize your CPP benefit amount. As of 2013, people who wait until age 70 to start receiving CPP benefits will receive as much as 42 per cent more than they would have at age 65. You may also want to make voluntary CPP contributions if you’re working between the ages of 65 and 70 since they will create additional post-retirement benefits.
Everyone’s financial situation is different, and there may be other factors to consider in addition to those listed above. A Chartered Accountant can help you assess the financial impacts of the myriad of CPP benefit planning choices.
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