Government pension plans, like CPP and OAS, should not be overlooked. You contribute to CPP and should expect to receive those benefits. CPP benefits can have financial-planning implications, even for wealthy individuals who have contributed to the program throughout their working lives.
This can be one of the hardest questions to answer.
CPP retirement benefits are based on your average earnings during your working years and the age at which you apply for benefits. CPP will provide an estimate of your retirement pension based on benefits at age 65.
Under the new rules, after 2016, if you choose to take CPP early, your pension payment will be reduced by 0.6% for each month you are under age 65. If you wait until after age 65, your monthly pension payment will be increased by 0.7% for each month you are over age 65.
The recent changes to CPP have increased the incentive to apply for retirement benefits after age 65. From a purely financial standpoint, people who live beyond age 80 will be better off if they postpone their CPP application to age 70. But is this really the best choice for you?
Having several sources of retirement funding provides the luxury of choosing the optimal time to apply for CPP benefits. This presents some tax-planning opportunities.
If you were 65 in 2012, the maximum CPP retirement benefit was $11,840 per year. This may seem like a drop in the bucket, but with Canada’s graduated tax system, each drop can make a difference come tax time. Delaying application for CPP retirement benefits could present an opportunity to reduce the OAS clawback, especially if you expect to be in a lower tax bracket later in life.
Further, the increased monthly payout as a result of the delayed application could mean an extra 42% CPP benefit. Just don’t wait too long: applications after age 70 provide no additional benefit.
The reality is, as a result of taxable investment income, you will likely remain at the highest marginal tax rate throughout retirement.
Once the full CPP redesign is in place in 2016, applying for CPP at age 60 will mean a 36% reduction in monthly retirement payments. In today’s dollars, assuming 100% eligibility for benefits, the annual pension payment would fall to $7,578. A wealthy individual in the highest marginal tax bracket could invest this income, and with a rate of return of 4% (before tax), it would take close to 15 years to break even, compared to waiting and taking CPP at age 65.
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