When it pays to take CPP early

Do any of these special circumstances apply to you?

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by

From the September/October 2014 issue of the magazine.

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Getty Imahes / BJI / Blue Jean Images

Getty Imahes / BJI / Blue Jean Images

Deferring government benefits past age 65 means eventually receiving higher payouts. But in the following situations, you’d be well advised to take Canada Pension Plan or Old Age Security as soon as you can after you retire:

You’re in poor health. The age-adjustment factors that reward you for deferring government benefits are meant to be “actuarially neutral,” which means they are intended to provide no major financial advantage or disadvantage if you have average life expectancy. However, if you think you have reduced life expectancy because of poor health, then consider starting benefits as soon as you’re eligible.

You had several low-income years during your career. CPP calculations are based on averaging your contributions and “pensionable earnings” from age 18 until you start taking the benefit. But the government allows you to drop 17% of your lowest earning years—plus additional years for child-rearing or disability—from the calculation. That works out to eight years if you retire at 65.

If you have used up all your drop-out years when you retire before 65 and don’t start CPP right away, then you’ll keep adding zero-earning years to the averaging calculation. In that situation, deferring CPP will bring your basic entitlement down.

You expect to get GIS. If you expect to receive the low-income Guaranteed Income Supplement and retire before 65, you’re generally best off starting CPP immediately at a reduced rate. That’s because every $1 of CPP payout reduces your GIS entitlement by about 50 cents when GIS starts at age 65 or later. (Note that your Old Age Security benefit has no impact on your GIS entitlement.)

Your portfolio is beaten down. The decision to defer government benefits includes an element of market timing. Since you’ll be dipping into your nest egg sooner to meet your spending needs, that strategy makes more sense if you think it’s a good time to sell investments. If you retire during or after a bear market, starting government benefits earlier will reduce your need to sell investments at beaten-down prices and give your portfolio a chance to recover.

16 comments on “When it pays to take CPP early

  1. If you have used up all your drop-out years when you retire before 65 and don’t start CPP right away, then you’ll keep adding zero-earning years to the averaging calculation

    I believe that you are wrong about this. Even though you may be adding extra years of zero earnings, you can drop those years out of the calculation under the “over 65 dropout” provision.

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    • If less than 65 0 years impact, other reasons for early reduced is if your total income could clawback OAS or if you and spouse both get max and death benefit may be of value

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    • but isn’t the article referring to before 65 zero income years? and how does anyone have zero income unless they are homeless or…?

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      • you strucxture your income and stop working before 65 – I did and took CPP @ 60 simply because delay was cutting the benefit by 4% per year

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    • What was stated was correct. It applies to those retiring before 65. Your scenario (retiring at 65,but not drawing cpp) is different. If youre over 65, and retired with no income- there would be no reason to delay CPP withdrawl, as adding zero income for any number of years isnt going to increase your monthly stipend, infact your losing money as the payments could end at anytime.

      Reply

  2. I believe when you are widowed there is a maximum payout and if you worked steadily and your CPP will be full you will not get it because you r receiving the survivor pension, therefore if you need the extra take it early.

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    • If you receive a CPP survivor pension, what happens to your own CPP? Reduced? Full? Don’t get it at all? Take it later, if you don’t need it?
      Thanks.

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      • The Survivor Benefit is added to your CPP with the sum being subject to the cap at (can’t recall exact figure) $1024 ? Hence, for me, it made sense to take CPP early as at 65 I would be subject to the cap….

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  3. What is your opinion on starting your CPP early even if you are still working and use your CPP to contribute to your RRSP {negating the tax effect}. At a 4% growth on your investment, the break even point would be the pensioners late 70’s? It also has potential to create a larger estate for your survivors!

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  4. Thank you MoneySense!! This is very timely for me. I’m a 58 yr old woman – semi retired, self employed since I was layed off several years ago. (My husband is retired, drawing CPP and OAS.) We have $550,000 savings/investments and a $480,000 condo. No debts. We’ve been trying to figure out whether I should start taking CPP at 60 for exactly the reason outlined above – re the accumulation of low earning years, because I’m well beyond my maximum drop out years overall. My current income is $12,000 to $15,000 which I intend to continue indefinitely – we’ll play around with various tax impact scenarios next tax season using the online tax program Turbotax, but we’re assuming that although I’ll obviously be paying more taxes on the combined work and CPP income, it won’t be enough to make it unreasonable to continue work. The cash-flow makes a huge difference to the extent to which we have to draw on investments. I’ll look forward to following further discussion here on the topic.

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  5. I started collecting CPP at 60 as I figured some money now is better than a little more later. I might not be around later, although as it turned out I am around later.

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  6. Can you elaborate a bit more on taking CPP early and drop out years?

    I’ve contributed the max amount into CPP since I’ve been 18 years old – 45 now. So if I keep working, I should then start taking my CPP at 57 years old because I will only have drop-out years left from 58-65 years old (8 years)?

    It’s a bit confusing to me. I’m trying to figure out the best time to take CPP early for my retirement planning as I’d rather take a penalty early and have the money rather than wait till 65.

    Reply

    • You must be a minimum age 60 to receive CPP.
      Maximum CPP is based on 39 working contributing years.

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  7. After I read my comment I think I should have asked whether my income from age 58-65 would really make any difference to increasing my CPP since I would already be at the max years for contributing at age 57?

    I still could delay taking the CPP past 57 to reduce the penalty a bit depending on my financial situation at the time I suppose.

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    • Working past 57 still allows you to drop the 8 lowest years of contributions which should increase the monthly payment.

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  8. I just resigned from my job at GE and my pension sits at 35,000. I plan to start my own home based personal training business. I can choose to take $400 per month starting in 2043, or roll it over to an investment vehicle. My TFSA was maxed out last year but I do have room for this year. What should I do, I don’t really understand annuities.

    Reply

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