The Canada Pension Plan (CPP) is a retirement savings plan for all eligible working Canadians. It provides a monthly income to eligible contributors and their partners in retirement. The CPP retirement pension is a taxable monthly benefit that starts as early as age 60 or as late as age 70. The decision of when to take the CPP pension will have a significant impact on your retirement income, and it is essential to understand the options and their consequences before making a decision.
CPP Benefit Calculation: The amount of CPP benefit you receive depends on how much you have contributed to the plan and for how long. Your average earnings and the number of years you have made contributions to the plan are used to calculate your CPP pension. The CPP formula takes into account your highest earning years, up to a maximum of 39 years, and replaces them with the average of your highest earnings. The formula is adjusted annually to reflect changes in average earnings.
The CPP retirement pension is calculated as follows:
- The amount of your average monthly earnings is multiplied by the number of years you have made contributions to the plan, up to a maximum of 39 years.
- The result is divided by the number of months in the calculation period, which is usually the number of months between your birth month and the month you reach age 65.
- This amount is then multiplied by the percentage of your average earnings that is considered pensionable, which is currently 9.9%.
- The resulting number is your CPP pensionable earnings.
- The CPP pensionable earnings are then multiplied by the replacement rate, which is currently 25%.
Table 1: CPP Benefit Calculation Example
| Year | Average Monthly Earnings | Pensionable Earnings |
|---|---|---|
| 1 | $2,500 | $2,375 |
| 2 | $3,000 | $2,820 |
| 3 | $2,500 | $2,375 |
| 4 | $3,500 | $3,165 |
| 5 | $4,000 | $3,600 |
Average monthly earnings: $3,100 Pensionable earnings: $13,725 CPP Pensionable Earnings: $3,431.25
Taking CPP at Age 60
Taking your CPP at age 60 is the earliest opportunity to start receiving your CPP pension. The CPP pension is reduced by 0.6% for each month that you receive the pension before your 65th birthday. This means that if you take your CPP at age 60, your monthly benefit will be reduced by 36% compared to what you would receive if you started receiving the pension at age 65.
Table 2: CPP Benefit Reduction Example
| Age | Monthly Benefit | Reduction |
|---|---|---|
| 65 | $1,000 | 0% |
| 60 | $640 | 36% |
Pros:
- Taking your CPP at age 60 provides you with additional income earlier in your retirement.
- You may choose to take the CPP at age 60 if you need the money for living expenses or other financial obligations.
Cons:
- The monthly benefit is reduced by 36% compared to what you would receive if you started receiving the pension at age 65.
- The reduced benefit will continue for the rest of your life.
- Taking the CPP at age 60 will result in a lower lifetime income compared to waiting until age 65 or 70
Taking CPP at Age 65
Taking your CPP at age 65 is the standard age for starting to receive your pension. It is the age at which you are eligible to receive the full CPP pension, based on the formula outlined above.
Pros:
- You receive the full CPP pension amount, based on the formula outlined above.
- The full pension amount will continue for the rest of your life.
Cons:
- You have to wait until age 65 to start receiving your pension.
- If you are still working at age 65 and contributing to the CPP, your pension may be reduced by the CPP retirement pension earnings test.
Taking CPP at Age 70
Taking your CPP at age 70 is the latest opportunity to start receiving your CPP pension. If you choose to take your pension at age 70, your monthly benefit will be increased by 0.7% for each month that you delay receipt of your pension after your 65th birthday. This means that if you take your CPP at age 70, your monthly benefit will be 42% higher compared to what you would receive if you started receiving the pension at age 65.
Table 3: CPP Benefit Increase Example
| Age | Monthly Benefit | Increase |
|---|---|---|
| 65 | $1,000 | 0% |
| 70 | $1,420 | 42% |
Pros:
- Taking your CPP at age 70 results in a higher monthly benefit compared to starting at age 65.
- The increased monthly benefit will continue for the rest of your life.
- You have the potential for a higher lifetime income if you live into your 80s or 90s.
Cons:
- You have to wait until age 70 to start receiving your pension.
- If you pass away before reaching age 70, you will not receive the increased benefit.
The decision of when to take your CPP pension is a personal one and will depend on your individual circumstances and financial goals. Factors such as your expected retirement age, expected lifespan, and current financial situation will all play a role in determining the best option for you. It is essential to consider the pros and cons of each option and to consider your overall financial plan before making a decision. If you are unsure about when to take your CPP pension, it is recommended that you speak with a financial advisor to help you make an informed decision.