Are you thinking about retiring soon? One important consideration in this process is whether you should start your Canada Pension Plan benefits early or late. Now that tax season is over for most people (proprietors have until June 15 to file their returns), this is a question tax specialists and their pre-retiring clients should be discussing sooner rather than later. In fact, anticipating the after-tax consequences of this decision can help spur on broader retirement planning activities.
Planning tips to discuss include the following:
- First, CPP retirement pension benefits are taxable. Also, it’s possible to split them with a spouse. This is done by applying to Service Canada for an assignment of benefits if both spouses are at least age 60. The object is to try to smooth out the taxes payable between the two for a better overall after-tax result.
- Taking CPP early will reduce overall benefits. The benefits reduction rate is 0.60% for each month between your start date and your 65th birthday. It’s important to check with a tax specialist to find out exactly what the cost of various timing scenarios would be to your potential pension and what the “break-even” point is.
- Knowledge Bureau has an excellent professional tax calculator to help with this: The CPP Income Calculator is a critical tool in helping to decide—should I take my CPP early or late? It’s part of the Knowledge Bureau’s Client Relationship toolkit and available for trial at this link: http://www.knowledgebureau.com/index.php/tools-resources/calculators/
- If you continue to work while receiving the CPP, you’ll have to continue to pay premiums at least to age 65. But you’ll shore up your future benefits with a Post-Retirement Benefit (PRB). This will increase your benefits, but only slightly.
- Remember you can opt out of paying CPP premiums at age 65 if you’re already receiving your CPP retirement pension. Do so by filing form CPT30 with your employer, the month before you wish to stop. Or if self-employed, complete the opt-out declaration on Schedule 8 of your personal tax return.
- Some good news: If you choose to delay starting your CPP pension until after you’ve turned 65, you’ll receive a premium of 0.70% for each month you delay until your 70th birthday. If you delay as long as possible, your pension will be increased by 42%. However, if you continue to work during this time, you’ll have to continue to contribute until you start receiving your pension or turn 70.
This important question of whether to start early or delay starting your pension is best planned with the help of an MFA-Retirement and Estate Services Specialist™, who is trained to project retirement income planning options. Professional advisors may also consider taking in the Distinguished Advisor Workshops to discuss retirement planning opportunities prompted by recent federal and provincial tax changes.