A common question among people who are approaching their retirement years is when should they start receiving Canada Pension Plan (CPP) benefits?
The amount of the CPP benefits that you will receive is based on your average earnings throughout your working life, your contributions to the CPP, and the age that you choose to begin receiving CPP benefits.
It is possible to start receiving CPP benefits as early as age 60 or as late as age 70. However, if you start receiving your CPP benefits earlier, the monthly amount you receive will be smaller than if you had waited to start receiving CPP benefits.
The maximum possible CPP benefit per month in 2020 is $1,175.83 for those who begin receiving benefits at 65 and $1,669.68 for those who begin receiving benefits at age 70; however, most Canadians will not receive the maximum amounts.
For 2020, the average monthly retirement benefits, based on the age at which you start receiving benefits are as follows:
Age Benefits Start:
$443 per month
$692 per month
$983 per month
The increase in the amount of CPP you will receive if you wait is significant. In fact, your CPP benefits would be at least 42 per cent higher at age 70 than they would be at 65. So how do you decide when to start receiving CPP? The answer to this seemingly straightforward question is that it depends on your personal circumstances.
Are your retirement savings primarily in registered plans such as Registered Retirement Savings Plans or a Registered Pension Plan with your current or former employer? As contributions to registered plans are generally tax deductible, any payments that you receive from them are taxable. One strategy used by retirees is to withdraw from their RRSP’s while they are in their 60’s and deferring their CPP until they are 70. Using your RRSP’s in your early retirement can assist you in maximizing your after tax income after the age of 70 by providing you with a higher CPP which provides a safer income stream.
If you have invested primarily in non-registered investments such as Tax Free Savings Accounts and term deposits, you will not be taxed on the amount of your withdrawals. As a result, you may decide not to delay receiving CPP until 70.
Another consideration in deciding at what age to start receiving CPP is your life expectancy. Do you have a healthy lifestyle? Until what age did your grandparents live to? While it may be uncomfortable to consider your own mortality, your life expectancy is an important factor to consider when deciding whether to start receiving CPP at 60 or to wait until an older age.
Whether you decide to work past the age of 60 is another factor to consider. While it is possible to work and receive CPP benefits at the same time, you and your employer will be required to make CPP contributions until you reach the age of 65.
If you are approaching retirement and are curious what your monthly CPP benefits would be if you start receiving them at age 60, 65 or 70, you can view your estimated monthly CPP benefits using your Government of Canada My Service Canada Account. Your personalized CPP estimates can be found under the Service Canada account services for the Canada Pension Plan. Don’t have a My Service Canada Account? You can access this account by first going into your CRA My Account.
If deciding when to start receiving CPP wasn’t complicated enough, it is also possible to defer receiving Old Age Security benefits until as late as age 70. While OAS payments normally begin at the age of 65, it is possible to request that Service Canada delay your benefits until you reach the age of 70.
To qualify for OAS, you must be 65 years old or older, a Canadian citizen or a legal resident and you must have resided in Canada for at least 10 years, since the age of 18. The amount of your Old Age Security (OAS) pension will be determined by how long you have lived in Canada after the age of 18 and the age at which you start receiving OAS.
By delaying your receipt of OAS benefits your OAS is increased by 0.6% for every month it is delayed, up to a maximum of 36% at age 70. For 2020, the average OAS benefit amounts are as follows:
Age Benefits Start:
$613 per month
$871 per month
One of the most important considerations when deciding when to start OAS is the Old Age Security pension recovery tax, or OAS “clawback” as it has come to be known as. The Old Age Security clawback means that high-income earners (over the age of 65) are required to repay some or all of their OAS.
The clawback threshold for 2020 is $79,054, which means that if you received OAS and your income in 2020 exceeds that amount, your repayment would be 15% of the difference between your income and $79,054. If your income in 2020 exceeds $128,137, the entire amount of your OAS received in 2020 will be clawed back. The amount clawed back is referred to as the repayment amount. Your repayment amount for 2020 would be divided monthly and deducted from your OAS pension payments as a recovery tax during the period of July 2021 to June 2022.
The OAS clawback is an important consideration in determining when to start receiving OAS since it may be advantageous to delay receiving OAS until age 70 when your income is lower, and your OAS benefits will be higher.
If this seems overwhelming, give us a call and RHN can help you work through the decision.
This post has been prepared for general information purposes. It is not advice. The information presented may not fit your unique situation, please consult one of our trusted business advisors at RHN CPA for further clarification and interpretation of your circumstances.