Retirement is something we all look forward to, and planning for retirement is a critical step that should not be overlooked. For some of us the benefits we receive from the Canada Pension Plan (“CPP”) will make up a significant portion of our retirement income. But did you know that effective January 1, 2012 the rules around how much you can collect, and at what age, are changing?
Currently you have the ability to start collecting CPP at age 60. To begin collecting CPP you cannot be working (or have income below a specific threshold) on the last day of the month prior to the first CPP payment, or in the month of that first payment. If you choose to collect CPP after age 60, but before age 65, the amount you collect each year is reduced 0.5% for every month before age 65.
For example if you were to begin collecting CPP at age 60 the amount you can collect each year is reduced by 30% when compared to collection at age 65. So why would anyone choose to take less money? The answer depends on how many years you plan to live. This is because the reduced amount collected early might be made up when compared to a larger benefit starting in a later year if you do not expect to live much past age 65. Also under the current rules if you were to start working again you could continue to receive CPP benefits and would not be required to contribute to the plan.
Beginning in 2012 the requirement to stop work has been eliminated. However the reduction in the amount of the benefit is also changed so that by 2016 a person collecting CPP at age 60 will have the amount they receive reduced by 36% (0.6% for every month before age 65). This is compared to a 30% reduction under the current rules. In addition, if you are under the age of 65 and collecting CPP, you and your employer will be required to contribute to the plan beginning in 2012. These contributions will increase the benefits you receive in future years.
Under the current rules anyone age 65 or older is not required to contribute to the CPP. Starting in 2012 anyone between the age of 65 and 70 has the option to continue contributing to the CPP. If you choose this option your employer is also required to contribute. While these added contributions will increase the benefits received in later years, the cost to the employer could provide a disincentive to an employer hiring someone over the age of 65 if they have opted into this.
While most people will choose to collect CPP starting at age 65 the current rules allow us to postpone receiving these payments until age 70. Waiting until age 70 will increase the yearly benefit by 30%. Under the new rules the increase in yearly benefits will increase to 36% by 2016.
Because the amount of CPP benefits received depends on when you start collecting it (less if collected before age 65 and more if collecting begins after age 65) the analysis of when to start collecting has always depended on how long you plan to live. Under the new rule this will continue to be part of the decision process. However the changes in the amount you can collect given the age you begin collecting, and the requirement/option to continue to pay into the Plan may change the decision you had made under the previous rules.
If you have not already considered how these new rules will affect your retirement plans it is time that you do. If you need assistance or have questions contact your accountant or financial advisor.
This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.