The maximum CPP payout for a person starting benefits in 2020 [at age 65] is $1,175.83 or $14,110 per year, indexed. The question arises: what does an annuity like this, indexed at say 2%, and with no survivorship or guarantee period, cost to buy with RRSP money?
We asked Asher Tward, Tridelta’s VP of estate planning, to generate quotes on a life-only, $14,110 per annum, single-person annuity, no survivorship, with the payment 2% indexed. He found a typical quote for a 65-year old male with 2% indexation was worth $316,000, while a typical quote for a 65-year old female with a 2% indexation was worth $355,000. We also asked what it would cost to buy the same annuity with a 60% survivorship payout to the surviving spouse. The relevant comparison is someone with no spouse or who has a spouse with maximum CPP against a person who has a spouse who has no CPP. For a registered annuity for couples like my wife and I, Tward found a joint annuity with 2% indexation and a 60% survivor benefit was worth $358,000, with either partner being the survivor.
So for a couple with maximum CPP, the total “value” is around $700,000. If they can afford it, they could defer collecting benefits by living off RRSPs and other savings; however, those assets are fully estate-protected for either survivors or beneficiaries. Baldwin says by choosing to defer CPP benefits, you have decided to use secure assets that would roll 100% to a spouse or beneficiary while leaving the CPP asset that could be worth nothing to a spouse/beneficiary. “This deferral enthusiasm seems a one-sided decision and a bit ‘penny-wise, pound-foolish’” Why not take the CPP’s asset value that is at survivorship/estate risk rather than roll the dice for sake of some deferral?
Baldwin looked at his own CPP contributions to get the theoretical value of the contributions to date. The total of his contributions as well as his employer’s contributions was only $95,000 and after adding in a 5% ROI, that total rose to $203,000. He notes this would not come close to buying a $14,000 per year indexed annuity!
“There is a degree of use-it-or-lose-it in the CPP,” Baldwin concludes, adding it behaves somewhat like a tontine, except with no lump sum at the end. (As a reminder, a tontine is a financial arrangement in which members form an asset pool and agree to receive payouts from it while living and to forfeit their accounts upon death. Forfeited balances are then split among the surviving members.) So, members earn not only investment returns but also mortality credits for as long as they survive. My logic is that if I have put $200,000 into CPP, I would like to get that value back over time since potentially very little would go to my spouse or an estate.”
OAS presents a similar issue: at just over $7,000 a year, it would have a value of around 50% of CPP: about $150,000, so why not collect as soon as possible? A qualifying couple could have $42,000 a year of pension just from double CPP and double OAS, and assuming both CPPs are at the max, the income could drop by 50% on the death of the first spouse. If your philosophy is to “get your money” back (all those premiums over the years), Baldwin says it takes 22 years of $14,000 per annum CPP to receive $316,000, which he views as more reason to discourage deferring CPP.
That said, some people can work beyond 65 and need to defer, and may not want to incur high income tax on immediate CPP payments. Finally, Baldwin suggests, another way to “protect” the CPP value would be to buy a piece of life insurance. That would require yet another column.
Jonathan Chevreau is founder of the Financial Independence Hub, author of Findependence Day and co-author of Victory Lap Retirement. He can be reached at [email protected].