If you’re like most Canadians who contributed in their working years, you’re probably wondering when to apply for CPP. In 2017, 5.8 million Canadians were beneficiaries of CPP payments.
Don’t worry, because we’re here to help. In this post, we’ll outline what to consider when applying for your benefits. So, when is the best time to start receiving CPP?
The ideal age to start collecting CPP benefits varies depending on your specific circumstances.
The standard age to take CPP is 65, but you can choose to start collecting benefits as early as age 60 or as late as age 70. It’s important to consider all of your options and make the decision that’s best for you.
What to Consider in Taking CPP Payments
- Early payment at age 60 – If you take CPP before the age of 65, you will face a 0.6% reduction for each month you collect before your 65th birthday, which is 7.2% per year or a total reduction of 36% over 5 years.
- Delayed payment at age 70 – If you choose to take CPP at 70, you’ll have a 0.7% increase for each month after your 65th birthday, which is 8.4% per year or a total increase of 42% over 5 years.
One thing to keep in mind is that once you start receiving payments, you can change your mind and request to cancel your CPP up to 12 months after you start receiving it. However, you’ll need to reimburse the payments you’ve received.
So it’s important to plan wisely and make sure you understand all the details of the CPP before making any decisions. You also cannot contribute to the CPP past the age of 70
Here are some key factors and reasons to consider when applying for the CPP.
1. Your Financial Situation
Main factors to consider:
- Low retirement income
- High debt
If you find yourself in a difficult financial situation and are at least 60 years old, you may want to consider applying for the CPP.
This is especially true if you don’t have any other significant income sources to rely on.
Another reason to apply for CPP benefits sooner rather than later is debt. For example, if you are carrying high-interest credit card debt. In this case, it may make financial sense to pay it off quickly rather than wait and collect CPP over a longer period of time.
2. Life Expectancy
Main factors to consider:
- Health condition
- Reduced life expectancy
So when do you apply for CPP? The answer largely depends on your life expectancy.
If you have a health condition that is causing your life expectancy to be reduced, starting CPP as soon as you are eligible makes sense.
The breakeven age of taking CPP at 60 vs. 65 is around 74 years old. The math says it’s preferable to take CPP early if you don’t think you’ll live beyond 74 years.
A CPP Disability Benefit may be preferable to taking your CPP retirement pension early if your health issues qualify as a disability and you fulfill the eligibility criteria.
3. Bucket List Lifestyle
Main factors to consider:
- Change of lifestyle
- Increase in budget needed i.e. travelling, hobbies, interests
Love to travel and want to take advantage of all that retirement has to offer? You may want to apply for CPP sooner rather than later.
Many retirees choose to make the most of their early retirement years to finally cross off those bucket list items they’ve been putting off for years.
Their rationale is that they prefer getting reduced payments now but using them to create incredible experiences and will likely decrease spending as they get older and become less active.
4. Invest CPP Payments
Main factors to consider:
- Earning more than CPP annual growth in your portfolio
- Risk of investing
Another thing to consider is the CPP rise each year in terms of investing. A 7.2% boost in CPP each year (or 8.4% per year after age 65) is difficult to beat, especially if you don’t require the cash right now.
If your investment portfolio (such as a TFSA or an RRSP) is earning a healthy rate of return beyond the standard annual increase of the CPP, you may wish to take CPP early so that your money grows even faster.
As always, consider the risk of such investments compared to the guaranteed growth and security of your CPP.
However, if you’re earning 1-2% on GICs or high-interest savings, it may be suggested that you withdraw from those accounts before taking CPP.
5. OAS Clawback
Main factors to consider:
- Extra income may reduce OAS
- Receiving CPP while working increases taxable income
If your income is sufficiently high, there’s a possibility you’ll lose part of your other government pension: Old Age Security. In fact, every extra dollar of 2021 net income beyond $79,054 reduces OAS by 15 cents.
So, taking CPP early, and receiving the smaller payout, can help protect your OAS benefit.
Additionally, If you expect to work until age 70 and your income falls within a higher tax bracket, deferring CPP may help you save money.
Because CPP earnings are taxed, beginning them while working full-time will raise your taxable income.
As a result, you’ll pay more in taxes. However, if you defer them until after you retire and move into a lower tax bracket, you may preserve more of the benefit.
If you’re unsure whether advancing or delaying your CPP payments is the right decision for you, speak to an expert to help you make the right choice for your unique situation.
What is the Post Retirement Benefit?
Many Canadians are unaware of the post-retirement benefit (PRB) program offered through the CPP. Individuals over 60 who are still working and receiving the CPP benefit can now apply for extra benefits through the PRB program.
Because the PRB is a separate program from the CPP, not everyone is eligible. You must be receiving the CPP retirement pension and still be making Canada Pension Plan (CPP) contributions.
This is a somewhat new feature of the CPP. Originally, you were unable to make any more CPP contributions once you started receiving payments.
This was changed in 2012, allowing contributors to have more flexibility and increase their entitled benefits by continuing to contribute.
- If you’re a Canadian between the ages of 60 and 65 receiving CPP retirement pension payments, you are required to contribute.
- If you’re a Canadian between the ages of 65 and 70 receiving CPP retirement pension payments, you can choose to contribute.
If the latter is the case, you must complete the form Election to Stop Contributing to the Canada Pension Plan, or Revocation of a Prior Election.
Similarly to the CPP, the PRB payment amount depends on:
- Your income
- Your CPP contributions
- Your age as of the start date of the PRB
In 2022, the highest monthly CPP benefit you can receive is $1,153.59 if you are 65. The maximum monthly PRB is approximately 1/40th of that, or $36.26 for the CPP and $28.08 for the QPP.
In order to find out how much you could receive in PRB payments, use the Canadian Retirement Income Calculator for an estimate. The calculator can also give an estimate of your CPP and OAS payments.
What Happens to CPP Upon Death?
As uncomfortable as it may be, sound financial planning also needs to take into account one’s life expectancy. This is particularly important when it comes to pensions like the CPP and deciding when to start receiving payments.
The surviving spouse or common-law partner of a deceased contributor is eligible for the Canada Pension Plan (CPP) survivor’s pension, which is a monthly allowance paid to the legal spouse or common-law partner of the deceased contributor.
Survivor’s Pension
If you are 65 or older and not receiving any other CPP benefits, you are entitled to receive 60% of the contributor’s retirement pension.
If you are 65 or younger and not receiving any other CPP benefits, you are entitled to receive a flat rate portion and 37.5% of the contributor’s retirement pension.
Death Benefit
The death benefit is only available to those who paid into the Canada Pension Plan (CPP) for at least ten years or one-third of the calendar years in their contributory period for the base CPP, but no less than 3 calendar years. The death benefit is fixed at $2,500.
How do I apply for CPP?
To apply for CPP, you must complete the CPP Application form. You can either download it from the Service Canada website or pick up a copy from your local Service Canada office.
Generally, replies to online applications are received within 14 days whereas replies to paper applications are received within 120 days.
One common myth and reason for applying early is that the CPP will not last. As widespread as this may be, it is unlikely.
A recent report by the Chief Actuary of Canada indicated that the CPP is sustainable for another 75 years based on their projections.
Conclusion
There’s no one-size-fits-all answer to when to apply for CPP, since everyone’s situation is different.
However, by understanding the eligibility requirements and taking into account your specific situation, you are now equipped to decide when the time is right for you to apply.
Next, check out How Much Do I Need To Retire In Canada: 5 Simple Steps.
