Readers weigh in on when to take QPP
While waiting means more money, others want to collect while younger, `more active'
Last week's column about delaying Quebec Pension Plan benefits generated a multitude of comments.
Many were along the lines of “Who knows when I'll die, so I'm better off getting some money in my early 60s than nothing.”
That is certainly a risk if you put off collecting QPP, though not an overly large one if you're in relatively good health. As noted in the column, the average life expectancy in Quebec now is 82.8 years.
But death does indeed stop the QPP cheques (except for the survivor benefit, payable to the life partner of a deceased QPP recipient, and the death benefit of up to $2,500 that goes to the heirs or whoever paid the funeral expenses).
For some, the key consideration is quality of life. Waiting until 70 to apply for QPP may generate more cash by the time you're in your 80s, but it will deprive you of some disposable income in your 60s, when you're more likely to still be a spender. Images of Quebec nursing homes during the early days of the pandemic were a sobering reminder of what may lie ahead, and for many reinforced the urge to spend while it's still fun.
“Why wait for the money you're owed when you can collect it during your more active, needy years?” one reader wrote.
Another argued that inflation, and the likelihood of significant currency devaluation (especially now, with the added debt generated by government COVID-19 spending sprees), make it more logical to get current dollars and put them to use while their purchasing power is higher.
“Governments want you (to delay applying for QPP or Old Age Security) as they're trying to devalue the currency to pay off the enormous debt they have created,” he said.
To me, an annual boost of 8.4 per cent (from ages 65 to 70) for putting off QPP payments is an interesting return on a safe and guaranteed stream of income, but not everyone sees it that way.
“If two people the same age with the same benefits both get a six per cent annual yield (investing their QPP cheques), but one starts at 60 and the other waits until 65, the early bird stays ahead until age 81, even with the pension reduction. If the yield is eight per cent, he stays ahead until age 90. Of course, I'm ignoring taxes here. After I did this analysis, I applied for my pension tout de suite. I'm 61,” one reader said.
Taxes, unfortunately, are a big part of the equation, since QPP is taxable income. And where do you see tax rates going from here, given the level of government indebtedness?
Investment returns could also be much lower in the next decade than they've been in the previous one.
Some readers suggested that getting their pension early and directing that money into registered retirement savings plans (for those still working) or tax-free savings accounts would produce better results over time than delaying QPP until as late as 70.
That could certainly work for those who haven't used either vehicle to full advantage. But a lot of people in their 60s have maxed-out TFSAS and sizable RRSPS. They're actually looking to reduce their RRSPS in a tax-efficient manner before reaching the point of obligatory withdrawals.
Some people still don't seem to have a full understanding of the mechanics of RRSPS. One commenter on the Montreal Gazette's Facebook page, advocating for directing early QPP payments into RRSPS, wrote that “when you die, your kids keep your RRSP. The government doesn't give them any of your QPP.”
In fact, kids keep what's left of the RRSP after the government takes its cut. Tax-free RRSP transfers are allowed only to spouses or common-law partners of the deceased or financially dependent children or grandchildren.
Effective QPP strategies differ based on individual circumstances, but “many people make the wrong choice either due to bad advice or lack of financial education,” said one respondent from the financial services industry.
There's certainly a lot to take into account, which means this is a decision that should be pondered, not quickly made.