When to Take CPP
Before the federal government made changes to the penalty for taking CPP payments early, it was a pretty clear choice for most people. With the new rules now coming into effect over the next few years, this decision has gotten a little bit tougher. There really is no clear answer and each person must evaluate their individual situation.
Under the old rules, the CPP benefits were reduced by 0.5% for each month that an individual collected benefits prior to their 65th birthday. That translated into a 30% reduction for someone who began receiving benefits right at age 60. These reduced payment amounts were offset by the fact that you received 5 additional years of monthly payments.
With the new rules now gradually rolling in, the monthly payment will increase from 0.52% in 2012 up to 0.6% by 2016. The “cross-over” or breakeven age with the old rules was age 80. This meant that if you lived beyond age 80, waiting until age 65 would net a higher benefit amount. With the 0.6% penalty, the cross over age has moved closer to 75. As people live longer and longer, the odds of living past age 75 are continuously increasing for the average Canadian.
So what’s the right decision? 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.
If you’ve stopped working – CPP benefit calculations allow a maximum of 7 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.
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.
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