When to take CPP

The question of when to begin taking your Canada Pension Plan (CPP) benefits is one that comes up regularly and something that seems to never have a definitive answer on. The reason why it’s not a clear answer though is simple – everyone’s situation is different and the right answer for each person will vary.

A report last week that was released by the Canadian Institute of Actuaries concluded that “delaying CPP payments is clearly a financially advantageous strategy” for the majority of Canadians but I couldn’t disagree more. It is this kind of misinformation that makes it so hard for Canadians to make sound financial decisions.

Before the federal government made changes to the penalty for taking CPP payments early, it was a very clear choice for most people – you would almost always want to take CPP early. With the new rules that were put into effect a few years ago, this decision has gotten a lot tougher but has certainly not swung firmly the other way. There really is no clear answer and each person must evaluate their individual situation.

So how do you make the right decision? For starters you need to make sure you do the math correctly when making a comparison. Taking the CPP early vs starting at age 65 or even delaying to age 70 is not as simple as totalling up the extra payments you get and then deducting the reduction amount to find out how many years it takes to “break even”. Doing so would assume you take all the extra payments and sit on the cash idly for the next 20+ years.

If you want to do a true comparison, you would need to total up all the extra payments you receive for starting early and invest that money into something that produces a decent rate of return. You’d then subtract the reduced payment amount from this continuously compounding amount to find a true break even point.

Alternatively, you would run your existing retirement savings through a retirement income calculator to see what it would cost to pull the extra needed funds from there early if you chose to pull extra money out early until your CPP kicks in. Either way, a proper financial planning process would need to be used to do a true comparison.

Although I still feel that taking the payments early is in the best interest of most people, each individual must decide for themselves. Here are a few sample scenarios that would help to decide what’s right for you:

Start at age 60 Poor health – If you expect a shortened life span due to health issues and/or family history, it may be best to start taking CPP payments right away.

If you need the money – If you need the money now and the CPP benefits would cover the cash flow shortage, start right away. It’s better to start now instead of building a balance up on a loan or line of credit that charges you interest.

If you’ve stopped working – CPP benefit calculations allow a maximum of seven years of low or no earnings to be excluded. If you’re no longer working, your benefit amount may actually suffer if you wait.

OAS Clawback – Receiving a lower CPP payment amount may help those on the fence to qualify for the Guaranteed Income Supplement or to avoid the Old Age Security (OAS) claw-back.

Wait until age 65 (or later) High tax year – If you’re selling a business, property or other assets and you expect to be in an unusually high tax bracket, it’s best to wait at least a year or two until that is over.

You have a pension with a bridge option – Many defined benefit pension plans offer a “bridge option” designed to integrate with CPP payments starting at age 65. These pensions offer a higher payment for the first few years and the drop at 65 when the CPP kicks in which may allow you to smooth out your income for tax purposes.

Family history of longevity – If you’re in good health and your family has a history of living to an old age, you may be best to wait so that you maximize your payment amounts.

You are still working – If you start taking CPP payments in addition to a full income, you may end up paying a higher tax rate on those benefits. While you’re still working full time, it may be best to wait.

These and many other factors can and should come into making the decision on when to start taking CPP and those that are unsure should consult a Certified Financial Planner (CFP®) Professional to get some guidance.

Any report or study that suggests it is a clear decision one way or the other should be ignored.