PDF VERSION

SHOULD YOU CONSIDER DELAYING YOUR CPP BENEFITS?

Author:

François Bernier, notary

Director, Tax & Estate Planning

Retirement income planning: Should you consider delaying your Canada Pension Plan (CPP) and/or Quebec Pension Plan (QPP) benefits?

Over the course of this paper, we will recap an exceptional paper released by the Canadian Institute of Actuaries1. As one might expect, there is no simple answer to the question of whether to take CPP/QPP early (recall the word “actuaries”). However, the paper summed up the reasons to consider taking CPP/QPP early as follows:

According to the Canadian Institute of Actuaries, the reasons for an individual to consider…

…taking CPP/QPP early

• If you project having a shorter life expectancy/have health problems.
• You will be receiving the Guaranteed Income Supplement (GIS) (beneficiaries of the GIS have a shorter life expectancy than the average population).
• You can generate “outsized” returns with your registered investment portfolio.

• If you project having an “average” life expectancy.
• If you expect “normal” rate of return from your registered portfolio.
• You want a stream of income that is inflation protected in retirement.
• You want to avoid market risk with a portion of your portfolio.

Description of the CPP/QPP

The CPP/QPP2  is a compulsory public insurance plan for individuals aged 18 and over who are working and have  an annual income over $3,500. It offers basic financial protection during retirement, after death or in the event of disability. The CPP/QPP aims to replace 25% of the average income in retirement.

Starting January 1, 2019, CPP/QPP was enhanced, aiming to increase income replacement to 33.33% from 25%. This improvement, which is being implemented gradually, may provide future generations with better financial protection in retirement. For these individuals, their CPP/QPP will increase based on the number of years they contribute to a new supplementary plan. The full effect on benefits may be achieved in about 40 years. Individuals who do not contribute to the supplementary plan because they stopped working before January 1, 2019, are not affected by these changes.

Contributions

CPP/QPP is financed by contributions from workers and employers in Canada. For 2022, the total contribution rate

to the basic and the supplementary plan is 11.4% of income for CPP and 12.3% for QPP, shared equally between the employee and the employer. This rate applies to the portion of the employee’s income between the general exemption of $3,500

and the maximum annual pensionable earnings on which an employee can contribute, which is $64,900 in 2022.

The maximum CPP contribution in 2022 is $6,999.60, shared equally between the employer and employee ($7,552.20 for the QPP).3

1 The CPP Take-Up Decision, Risk and Opportunities, Canadian Institute of Actuaries and Society of Actuaries, July 2020.

2 The Quebec Pension Plan applies only to persons who work in Quebec.

3      https://www.canada.ca/en/services/benefits/publicpensions/cpp/contributions.html;   https://www.rrq.gouv.qc.ca/fr/programmes/regime_rentes/travail_cotisations/Pages/ calcul_cotisations.aspx

Let’s compare: taking CPP/QPP early vs. delaying

Canadians can take CPP/QPP earlier than age 65 in exchange for a 0.6% reduction in benefits per month (7.2% per year). For example, if the expected CPP/QPP pension at age 65 is $1,000 a month, an individual taking CPP/QPP at age 63 would see a reduction of 14.4% in their benefits, and would instead receive $856 each month. We calculate this as follows: 24 months X 0.6%/month X $1,000 = $144 reduction/month.

Alternatively, individuals can choose to defer CPP/QPP up to age 70 in order to receive an increase in benefits equivalent to 0.7% per month, or 8.4% per year. For example, if the expected CPP/QPP pension at age 65 was

$1,000 a month, an individual who deferred CPP/QPP to age 68 would see an increase in benefits by 25.2%, and would receive $1,252/month (36 months x 0.7% X $1,000 = $252 increase/month).

Note that deferred CPP/QPP benefits are also wage-indexed during the deferral period, further increasing the benefits of deferral.

The table below illustrates the effect of delaying or taking CPP/QPP early:

Less than 5% of Canadians defer CPP/QPP payments past age 65, and fewer than 2% choose to delay until age 70.4

4 The CPP Take-Up Decision, Risk and Opportunities, Canadian Institute of Actuaries and Society of Actuaries, July 2020.

Which strategy is best for you? Talk to your advisor, and consider life expectancy and investment returns

One popular financial planning strategy is to take-up CPP/QPP payments as early as possible. This approach is based on investor behaviour (would you loan money to someone interest-free for 14 years?) and on the fact that retirees often have more income needs early in retirement.

Another approach is based on the “breakeven” age. This is the age where the cumulative CPP/QPP payouts received from taking CPP/QPP early are equal to the cumulative benefits received when deferring. It is possible to mix other factors into the equation, such as marital status, ability to split/share income with the spouse or common-law partner, RRSP contribution room available, access to other sources of income, state of health, family longevity trends, and more.

The study we mentioned earlier by the Canadian Institute of Actuaries, called The CPP Take-Up Decision5, sheds light on the benefits and downsides of choosing to take-up CPP early or to defer.

The study analyzed workers retiring at age 65 with sufficient savings to delay CPP payments for five years, until age 70. The analysis found that, for the majority of Canadians with sufficient RRSP/RRIF savings to bridge the gap between age 65 and 70, the decision to delay CPP payments should depend almost exclusively on investment returns and life expectancy:

To arrive at this conclusion, the study compares two financial strategies:

• Option #1: Delay CPP payments from age 65 to 70, using a portion of RRSP/RRIF savings (the bridging funds) to provide for withdrawals during that five-year period that exactly match the income that the CPP pension (adjusted for inflation) will provide when an individual takes it up at age 70.
• Option #2: Claim CPP payments at age 65 and self-manage the portion of RRSP/RRIF savings (that would have otherwise been used to bridge the five-year gap in Option #1) over retirement so as to achieve the same net annual income (as in Option #1) throughout retirement (maintaining that level until death or the exhaustion of the bridging funds).

5 The CPP Take-Up Decision, Risk and Opportunities, Canadian Institute of Actuaries and Society of Actuaries, July 2020.

6 The CPP Take-Up Decision, Risk and Opportunities, Canadian Institute of Actuaries and Society of Actuaries, July 2020, p. 5

Here are some of their findings7:

A net rate of return of 4% and 6% was used for the purpose of this study. The rate of return of 6% represents an “optimistic” rate of return. The Financial Planning Standards Council of Canada uses more moderate assumptions for typical portfolios: 2.74% for a conservative portfolio, 3.53% for a balanced and 4.31% for a growth portfolio.8

The table above shows that a man has a 59% probability of survival to age 85. Should he live until 85, having chosen to delay CPP to age 70, and having invested in a “growth” portfolio, there is a 97% probability that delaying CPP would result in more retirement income than taking CPP at age 65. Additionally, in this scenario, there is 0% chance that the bridging funds saved by taking CPP early would still be remaining at age 85.

For a woman surviving to age 90 (a woman has a 50% chance of living until that age), there is a 100% probability she’ll receive more income in retirement by delaying CPP until age 70 than by taking it at age 65 (assuming that she invests in a “growth” portfolio). There is a 0% chance that the bridging funds saved by taking CPP early would still be remaining at age 90.

Another major advantage of delaying CPP payments is that it promises additional secure, lifetime income that increases each year alongside the price of consumer goods. This helps protect seniors against the financial risks associated with inflation, financial market returns, and longevity.

7 The CPP Take-Up Decision, Risk and Opportunities, Canadian Institute of Actuaries and Society of Actuaries, July 2020, p. 25.

8 2022 Projection Assumption Guidelines, Financial Planning Standards Council of Canada, 2022, available at https://fpcanada.ca/docs/default-source/standards/2022-pag--- english.pdf

Takeaways

In matters of financial planning, it’s difficult to generalize advice. The diversity of individual circumstances and the complexity of the Canadian retirement income system makes it difficult to provide the same advice to everyone. There may be individual situations where taking CPP/QPP early might make more financial sense.

Then again, in a low yield world where longevity is increasing, Canadian retirees with average return expectations for their RRSP/RRIF portfolio, and an average life expectancy, could potentially benefit from delaying CPP past age 65. This is especially true for women and conservative investors.

That’s why it’s beneficial to work with an advisor who can develop a tailored income plan specific to your retirement needs.

CPP/QPP Benefits

In addition to the retirement pension, the basic CPP/QPP plan provides various pensions and benefits9 to people who have contributed enough and, in some cases, to their family members:

• Post-retirement benefit: If an individual works while receiving a CPP/QPP retirement pension, they may increase their retirement income with a lifetime benefit. This is called the post-retirement benefit. An individual may be eligible if they are 60 to 70 years of age, working, contributing to the CPP, and receiving a retirement pension from

the CPP or QPP.

• Disability benefit and post-retirement disability benefit: This is a monthly payment for individuals who: are under 65, have made enough contributions into the CPP/QPP, have a mental or physical disability that regularly stops them from performing any type of substantially gainful work, have a disability that is long-term and of indefinite

duration, or is likely to result in death.

• Survivor’s pension benefit: The CPP/QPP survivor’s pension is paid to the legal spouse or common-law partner of the deceased contributor. If the surviving spouse is age 65 or older and not receiving other CPP benefits, they will receive 60% of the contributor’s pension. If the surviving spouse is under 65 and not receiving other CPP benefits, they will receive a flat rate portion of $204.69 plus 37.5% of the contributor’s pension.
• Children’s benefit: Provides monthly payments to the dependent children of disabled or deceased CPP/QPP contributors. The child must be either under age 18, or under age 25 and in full-time attendance at a recognized school or university.
• Death benefit: This is a one-time, lump-sum payment of $2,500 to the estate of the deceased CPP contributor.

Pension sharing and CPP/QPP

CPP/QPP benefits are not “eligible pension income” as defined under the Income Tax Act, and thus cannot be split with the spouse or common-law partner. However, the CPP/QPP retirement benefits can be “shared” with a spouse or a common-law partner.

To qualify for CPP/QPP pension income sharing, both spouses must be:

• 60 years of age or over
• living together and must have lived together while contributing to CPP/QPP
• receiving the CPP/QPP pension. If only one contributed to CPP, the spouse who contributed to CPP must be receiving their pension.

9      https://www.canada.ca/en/services/benefits/publicpensions/cpp/cpp-benefit/other-benefits.html;      https://www.rrq.gouv.qc.ca/en/programmes/regime_rentes/Pages/regime_ rentes.aspx