There are many Canadians contributing to the Canada Pension Plan (CPP) without a clear understanding of how it can benefit them, and when to make use of it. Today we’re delving into the CPP and what things you should consider before choosing early retirement.
When can you start collecting CPP?
The earliest you can start collecting CPP is age 60. However, collecting early (before age 65), will reduce your pension by 0.6 per cent per month up to a maximum reduction of 36 per cent.
The following table from Manulife Financial illustrates the impact of the CPP early retirement deductions. This illustration assumes an individual would qualify for a $1,000/month retirement pension at 65.
In comparison, waiting after the age 65 increases your pension by 0.7 per cent per month you delay collection, up to age 70. This means your maximum pension increase would be 42%. Following the same assumption of $1,000/month pension, here is an illustration of deferring at 65 to a later age.This table is the same as above.
How your benefit is calculated
The monthly amount you receive through CPP/QPP is based on your earnings over your contribution period. How is this calculated specifically?
Individual earnings
_______________ x Benefit rate (25%)
Contributory period
Earnings are also adjusted based on growth in your wages over the years. In addition, CPP allows for up to eight of your lowest earning years (17 per cent of contributory period) to be removed from the calculation.
Reasons to collect early
You’re no longer working/reduced income
If you have stopped working early and are no longer contributing, taking CPP early might be the right choice for you. Waiting during the years where you’re not making any income, or a reduced income may lower your overall benefit when you turn 65.
You may also want to take CPP early if your income is lower than the majority of your contributory period. As you continue to work, you can receive your pension and continue contributing between the ages of 60 and 65. This would result in an increased annual pension benefit, subject to your level of income. You can see more details regarding this benefit here.
You’re single
Without a spouse of children, the only death benefit with CPP is a lump sum payment of up to $2,500. That being said, it may be worthwhile for you to take CPP early to ensure you get as much out of the plan as possible.
You don’t qualify for a disability benefit
Disability benefits are higher than the retirement benefit, so if you qualify for disability, that is a better option. If you don’t quality, and you have health issues that will impact your life expectancy, early retirement may be a good idea for you.
There are a number of other considerations to take into account, which you can read about here. Contact us here at ACN Financial Group if you have any questions!