Applying for Canada Pension Retirement Benefit: 7 Factors to Consider

As a result of recent changes in the Canada Pension Plan (CPP) rules and regulations, a frequently asked question is “When should I apply for CPP benefits?” Is it at age 60? Or 65? Or 70? This article addresses 7 important factors that should be considered when applying for Canada Pension.

1.   Maximizing Benefits

In the past, many Canadians have chosen the earliest possible time when applying for Canada Pension, which was when they reached age 60. In doing so, the monthly benefit was reduced by a specific amount as compared to waiting until, say, age 65. However, it was the generally held opinion that the average CPP recipient would probably maximize their lifetime benefits by applying for Canada Pension early. The logic was that if you chose to wait until an older age before applying for Canada Pension, it would take many years at the higher benefit rate to recover the amount that you “forfeited” from age 60 to 65, or whenever you applied. However, ongoing changes being made to the CPP are causing many to question this rationale.

2.   Changes to the CPP

Ongoing changes to the amount of the CPP retirement pension are being implemented over time, from 2011 to 2016. As a result, by the end of 2013, when applying for Canada Pension at the age of 70, your pension amount will be 42% more than it would have been if you had taken it at 65.

Conversely, by the end of 2016, when applying for Canada Pension at the age of 60, your pension amount will be 36% less than it would have been if you had taken it at 65. For example, based on the 2013 maximum pension amount of $1012.00 per month, you would receive only $647.00 per month if you applied at age 60.

Important Note: If you don’t work after the age of 60 and delay applying for Canada Pension until you turn 65, the extra five years of no earnings will lower the amount of pension payable at age 65. This is because the period you are expected to pay into the CPP continues until you start receiving your retirement pension.

See my related article “5 Changes to CPP Retirement Benefits and How They Affect Canadians”, for more detailed information on these changes.

3.   Other Retirement Income

Many current or future CPP retirement benefit recipients have retirement income from employment, investment or other sources. It is very common for income from other sources to diminish over time. For example, many employment pensions which allow early retirement are reduced significantly when the retiree reaches age 65. Investment income can be exhausted after a period of time. In these cases, it would be prudent to consider applying for Canada Pension later in order to coincide with the reduction or depletion of other income sources. As well, this would facilitate a higher rate in the CPP retirement benefit as explained above.

4.   Financial Needs

When deciding at what age to apply for the CPP retirement benefit, a very important consideration is your financial situation. Consider the case of a 60 year old retiree who has retirement income which is more than sufficient to fund his current cost of living and other needs. In this case, he may want to postpone applying for Canada Pension until a later date, when there is a need for the additional income. This would also result in a higher benefit rate.

5.   Income Tax Considerations

CPP payments are taxable income which must be added to any other income you may have, including employment, investment or pension income. This increases the likelihood that a portion of your total income will fall into a higher income tax bracket. This is an important factor to consider in deciding when you will be applying for Canada Pension. It may be advisable to defer applying for Canada Pension until your income from other sources is reduced.

You may choose to have income tax deducted from your CPP payment each month. To request a monthly deduction, call Service Canada at 1 800 277 9914. If you do not request monthly tax deductions, you may owe income tax upon filing your return and be required to pay your income tax in quarterly installments in the future. For more information, contact a Canada Revenue Agency (CRA) Tax Services office.

Early each year, you will receive a T4A(P) slip showing the amount of CPP payments you received during the previous year. This slip is needed to complete your income tax return.

6.   Receiving Combined Retirement and Survivor’s Benefits

If you are receiving a monthly survivor’s benefit from the Canada Pension Plan and you apply for your CPP retirement pension, you will receive a combined monthly benefit.

Similarly, if you are receiving your CPP retirement pension and you apply for a survivors benefit following the death of your spouse or common law partner, you will receive a combined monthly benefit.

The amount of a combined survivors/retirement benefit is limited to the maximum retirement pension. For example, if you begin receiving a combined benefit in 2013, the most you will receive is $1012.00 per month*.

* reference: Service Canada website

7.   Obtaining an Estimate of CPP Benefit

If you would like an estimate of what your CPP retirement benefit will be, you can complete an “Estimate Request for a Canada Pension Plan Retirement Pension”. Service Canada will automatically calculate the amount you will receive at age 65. However, you can receive a CPP retirement pension as early as age 60. When applying for Canada Pension before age 65, Service Canada can estimate the retirement pension you could receive at that time. You can choose any two retirement ages between 60 and 70 for which you would like estimates. This information will be very useful in deciding when you will be applying for Canada Pension.

Conclusion

In the past, deciding when to apply for the CPP retirement benefit was considered by many to be a “no brainer”. However, it is no longer quite that simple in light of the ongoing changes to the CPP, which must be considered in conjunction with all other relevant factors. Ultimately, the decision of timing when applying for Canada Pension must be based on one’s individual circumstances and priorities.

For detailed information on all aspects of the CPP, visit the Service Canada website at www.servicecanada.gc.ca

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