When should you take Canada or Quebec Pension Plan benefits? It all depends on your income, health, and what you want to do with the money. The ground rules are set in regulations that say that, in comparison to the age 65 benefit, taking money early creates a rising penalty being phased in at 33.6% in 2014, 34.8% in 2015 and 36% in 2016 and thereafter for each year prior to age 65 that benefits begin. Waiting after age 65 to age 70 creates a bonus of about 8.4% a year for each year after 65 that one begins benefits. But when to start benefits is a personal matter and each person is different. The problem is to compare the penalty for early application with the greater returns for waiting, suggests Derek Moran, head of Smarter Financial Planning Ltd. in Kelowna, B.C.
1. If you are in ill health and think you may not make it to 65, start CPP benefits as early as possible. Benefits stop at death apart from special cases for surviving spouses who may be under 65 and certain children. By taking benefits beginning at 60 and suffering a reduced payment, one must live to 75 to make up the difference using 2014 payout rates
2. If you continue to work after age 60 or 65 and if you are still working as 70 approaches, postpone benefits to 70 in order to minimize taxes, for all CPP/QPP payments are taxable. The combination of wage or salary income, CPP or QPP income and Old Age Security, paid as early as 65 or as late as 67, can push one into a very high tax bracket. The effect is then to lower the amounts of other income one can retain.
3. Spending plans can also affect the initiation of CPP. If you expect expense to be higher in the early part of your retirement, perhaps for travel, then it can make sense to take the money when it’s needed, Mr. Moran notes.
4. Deferral of benefits after age 65 allows one to make additional CPP contributions to build up the pension base and raise benefits. Contributions made after the 65th birthday will increase retirement benefits at a rate of 2.5% of the maximum pension amount per year of additional contributions.
5. Making optional contributions to the Canada or Quebec Pension Plans after 65 is a tax shelter, for there is a deduction for contribution amounts. Federal and average provincial credits create a refund of about 25% of contributions. Long life makes it more worthwhile to keep on contributing to age 70 and capturing the other 75% in subsequent years.