PEN­SION STRATE­GIES

Post­pon­ing tak­ing CPP ben­e­fits un­til age 70 may help some clients.

Investment Executive - - FRONT PAGE - BY DOUG RUNCHEY

Doug Runchey founded DR Pen­sions Con­sult­ing, which pro­vides its clients — in­clud­ing fi­nan­cial ad­vi­sors — with ex­pert ad­vice on us­ing the Canada Pen­sion Plan (CPP). This in­cludes cal­cu­la­tions for fu­ture ben­e­fits and credit-split­ting ac­tions. Runchey was a man­ager in the fed­eral govern­ment’s in­come se­cu­rity pro­grams de­part­ment for more than three decades. Here, he an­swers a se­ries of top­i­cal ques­tions deal­ing with us­ing the CPP as part of a re­tire­ment in­come plan.

Ques­tion: How much is one year of max­i­mum CPP con­tri­bu­tions worth to­ward a CPP re­tire­ment pen­sion?

An­swer: The an­swer to this ques­tion changes each year, and it can also be af­fected by other fac­tors. For a re­tire­ment pen­sion start­ing in 2017, one year of max­i­mum con­tri­bu­tions would be worth $28.57 per month if:

n You have 39 or fewer years of con­tri­bu­tions; n you take the CPP at age 65; n you never took any time off work to raise chil­dren un­der the age 7;

n you have not re­ceived a CPP dis­abil­ity pen­sion.

Once you have more than 39 years of con­tri­bu­tions, or if you take the CPP be­fore age 65, the value of each year of max­i­mum con­tri­bu­tions de­creases. It could be as lit­tle as zero.

If you take the CPP after age 65 or took time off work to raise chil­dren or be­cause you were dis­abled, the value in­creases.

Q: What is the best age to be­gin re­ceiv­ing a CPP re­tire­ment pen­sion?

A: Some peo­ple be­lieve strongly that you should al­ways take it as early as pos­si­ble — age 60; oth­ers be­lieve equally strongly that you should de­lay as long pos­si­ble — age 70. I be­lieve that the an­swer de­pends on two main fac­tors — life ex­pectancy and other in­come sources.

As far as life ex­pectancy is con­cerned, if you sus­pect you will have a shorter than av­er­age life­span, you should take your CPP pen­sion as early as pos­si­ble; vice versa if you sus­pect you will have a longer than av­er­age life ex­pectancy. As far as other in­come sources, if you know that you will be el­i­gi­ble for the guar­an­teed in­come sup­ple­ment at age 65 or that you may be sub­ject to the old-age se­cu­rity (OAS) claw­back, then tak­ing your CPP early may be ad­vis­able in or­der to re­duce the monthly amount. On the other hand, if few of your other in­come sources are in­dexed to in­fla­tion, you may want to de­lay tak­ing your CPP as long as pos­si­ble to max­i­mize your fully in­dexed CPP amount. De­pend­ing on when other in­come streams start or end, you may want to take your CPP early or late to avoid high in­come-tax brack­ets.

Q: What is meant by the “age-ad­just­ment fac­tor” for CPP?

A: The “nor­mal” age for start­ing your CPP is 65, but you can take it as early as age 60 at a re­duced rate or as late as age 70 at an in­creased rate. The age-ad­just­ment fac­tor means that the amount of your CPP re­tire­ment pen­sion will be re­duced by 0.6% for ev­ery month that you start it be­fore age 65 — with a max­i­mum re­duc­tion of 36% at age 60. It will be in­creased by 0.7% for ev­ery month that you be­gin re­ceiv­ing it after age 65 — with a max­i­mum in­crease of 42% at age 70.

Q: Is the amount of your CPP based on your best five years of em­ploy­ment earn­ings?

A: No, the amount of your CPP is def­i­nitely not based on your best five years. In fact, it’s “nor­mally” based on your best 39 years. The only ref­er­ence to a five-year pe­riod un­der the CPP leg­is­la­tion is that the amount of your CPP is in­flu­enced by the av­er­age year’s max­i­mum pen­sion­able earn­ings ( YMPE) for the five-year pe­riod end­ing with the year that your pen­sion starts. This is true whether or not you ac­tu­ally had earn­ings dur­ing any or all of those five years.

Q: If you stop work­ing at age 57 and you want to be­gin re­ceiv­ing your CPP re­tire­ment pen­sion at age 65, will the eight years of zero earn­ings af­fect the amount of your CPP pay­ment?

A: The short an­swer is “maybe.” As the amount of CPP you re­ceive is nor­mally based on your best 39 years of earn­ings — in pro­por­tion to the YMPE for each year — the eight years of zero earn­ings be­tween age 57 and 65 may not af­fect you at all if you al­ready have 39 years of solid earn­ings by the time you turn age 57. This is be­cause at age 65, the gen­eral 17% dropout al­lows you to drop out your low­est eight years of earn­ings — in pro­por­tion to the YMPE.

If you al­ready have eight years of low earn­ings when you turn age 57, adding eight more years of zero earn­ings could re­duce the amount of your “cal­cu­lated re­tire­ment pen­sion” by ap­prox­i­mately 10%. This will partly off­set the in­crease that you will re­ceive as a re­sult of the agead­just­ment fac­tor. I re­fer to this sit­u­a­tion as “re­ceiv­ing a larger slice of a smaller pie.” But you’ll al­ways get more pie by wait­ing to take your CPP.

Q: Does your de­ci­sion about when to be­gin re­ceiv­ing your CPP af­fect the amount of sur­vivor’s pen­sion that your spouse will re­ceive after your death?

A: The short an­swer is “no”; but the longer an­swer is “maybe” — but not in the way you might ex­pect. First, the amount of any sur­vivor’s pen­sion that your spouse re­ceives will be based on your “cal­cu­lated re­tire­ment pen­sion,” which is be­fore any agead­just­ment fac­tor is ap­plied. This means that tak­ing the CPP at a re­duced rate be­fore age 65 will not di­rectly re­duce the amount of the sur­vivor’s pen­sion, and tak­ing it at an in­creased rate after age 65 will not di­rectly in­crease the amount of your sur­vivor’s pen­sion.

Q: Is it true that you can stop con­tribut­ing to CPP when you turn age 65, even if you con­tinue work­ing un­til age 70?

A: This is true only if you are re­ceiv­ing your CPP re­tire­ment pen­sion. In that case, you can opt out of mak­ing any con­tri­bu­tions after age 65 by com­plet­ing Canada Rev­enue Agency Form CPT30, or you can con­tinue con­tribut­ing to CPP and earn ad­di­tional post-re­tire­ment ben­e­fits.

Q: What are post-re­tire­ment ben­e­fits (PRB) ?

A: PRBs are ben­e­fits paid for any CPP con­tri­bu­tions made after you’ve al­ready be­gun to re­ceive your reg­u­lar CPP re­tire­ment pen­sion. Th­ese ad­di­tional con­tri­bu­tions won’t af- fect the amount of your reg­u­lar CPP re­tire­ment pen­sion — and they won’t be used for the cal­cu­la­tion of sur­vivor’s ben­e­fits — but each year of such ad­di­tional con­tri­bu­tions will cre­ate a monthly PRB that be­gins ef­fec­tive Jan­uary of the year fol­low­ing the con­tri­bu­tion. The amount of the PRB will de­pend on the amount of your earn­ings — in pro­por­tion to the YMPE — and your age as of that fol­low­ing Jan­uary. For some­one who is age 65 and has earn­ings at or above the YMPE, the monthly amount of the sub­se­quent PRB would be $27.85. This amount is added to your reg­u­lar CPP re­tire­ment ben­e­fit and is paid for life.

Q: What does the CPP state­ment of con­tri­bu­tions mean when it says, “You could re­ceive X if you were age 65 to­day?”

A: This means that the amount of your CPP re­tire­ment pen­sion will be that amount if you con­tinue to have earn­ings un­til age 65 at the same rate, rel­a­tive to the YMPE, as your current “av­er­age life­time earn­ings” — and con­sid­er­ing the gen­eral 17% dropout that has al­ready been ap­plied up to your current age.

Q: How will the “en­hanced CPP” changes af­fect some­one who is aged 50 to­day?

A: The en­hanced CPP changes be­gin to af­fect pen­sions that be­gin in 2019 or later, but no one will re­ceive the new 33.33% in­come re­place­ment of the new higher year’s ad­di­tional max­i­mum pen­sion­able earn­ings un­til 2065.

For peo­ple who are age 50 to­day, the great­est in­crease that they could re­ceive in their re­tire­ment pen­sion at age 65 is ap­prox­i­mately $152.50 a month. That pushes the current monthly max­i­mum of $1,114.17 to $1,266.67. This trans­lates to a 13.7% in­crease com­pared with the ap­prox­i­mately 52% in­crease that some­one who’s cur­rently age 18 could re­ceive.

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