early as age 60 or defer payments until as late as age 70. To account for the ... your RRSPs to a RRIF or purchasing an
Retirement Considerations By Cody Drysdale, Hon. BBA, CPA, CA
Canada Pension Plan (CPP) When considering your retirement planning you have the option to begin collecting CPP retirement pension as early as age 60 or defer payments until as late as age 70. To account for the extra years you will receive CPP payments if you start early the government reduces the amount of the payments each month you start early, whereas if you start late then the payments will be larger. Assuming you retire in 2015, the differences between collecting CPP early versus late are detailed below 1.
Collecting Early
Collecting at Age 65
Collecting Late
Increase (decrease) for each month collected either early or late
(0.58)%
No change
0.70%
Total potential increase (decrease) in annual payments
(34.80)%
No change
42.00%
The decision to start collecting CPP early or late is contingent on individual situations, but some general considerations are outlined below. Expected Life In general it is advantageous to start collecting CPP as soon as possible as we unfortunately cannot predict how long we will live for. By receiving payments early it reduces the risk that you will pass away before you have reached the age where it becomes beneficial to have taken a later start date. Based on the above rates, if you were to start collecting CPP at age 60 it would take until age 74 before it would have been advantageous to wait until age 65, whereas if you had waited until age 70 then it would take until age 81 before it becomes advantageous. Although a survivor benefit is available to a legal spouse or common-law partner, depending on the age of the survivor, the amount can be substantially less and therefore quickly eliminate any benefit of waiting to receive larger payments later in life. Employment/Self Employment Retirement If you have reached age 60 and are still working you may think that it would be disadvantageous to start collecting early as payments would be taxed at a higher rate than they would once you have retired. Although this may be true and should be a consideration, if you have available RRSP contribution room you can start receiving payments early and simply contribute these to your RRSP, thereby eliminating the additional taxable 1
(Service Canada)
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income from CPP payments. This will allow you to reduce the risk assumed by taking a later start date and will allow you to offset some of the reduction for taking early payments by earning a return on invested CPP payments. Conclusion Despite the benefit of significantly higher payments by deferring CPP, it is generally more beneficial to take payments as soon as possible. Furthermore, depending on individual situations, deferring payments may only result in a marginal benefit, while assuming the same level of risk. However, a CPP deferral may be wise when there is potential for an OAS clawback, as mentioned below.
Old Age Security (OAS) Starting in 2013, the Canadian government began offering the option to defer the receipt of OAS pension up to 60 months (5 years) after the date you become eligible. Similar to the deferral of CPP payments, every month you delay your OAS pension your monthly payment will increase 0.60%, up to a maximum of 36%.2 However, if this deferral is elected you will no longer be eligible for the Guaranteed Income Supplement and your spouse or common-law partner will not be eligible for the allowance benefit for the period the OAS pension is deferred. When is Deferral a Good Idea? In 2015, individuals receiving their OAS pension are subject to a 15% clawback of their pension for every dollar of net income before adjustments greater than $72,809. 3 This includes all taxable income earned during the year, as well capital gains earned in the current year even if there are losses from a prior year that can be applied against the gains. Deferral of the OAS pension is advantageous to anyone who is subject to a clawback and expects to have lower income in the future. An example of this is an individual that hasn’t retired from their job when they become eligible for the OAS pension. By deferring their OAS payments until they have retired they will include their pension payments in years where they likely will have lower income and therefore are less likely to have a pension clawback.
Registered Retirement Savings Plan (RRSP) Withdrawals from your RRSP are fully included as taxable income in the year you make the withdrawal, regardless of your age. However, as you approach retirement you can begin to take advantage of pension splitting and the pension tax credit to reduce your overall taxes of withdrawing funds. In the year that you turn age 65 you can start utilizing the pension tax credit by either converting a portion of your RRSPs to a RRIF or purchasing an annuity with RRSP funds. Both of these qualify as pension income for the pension tax credit, which in 2015 is $2,000. Accordingly, by taking advantage of this extra tax credit you can begin to withdraw savings out of your RRSP for up to 7 years at a tax cost equal to the difference between your current marginal tax rate and 18.30%.4 Depending on an individual’s current income level and expected income levels in retirement this can provide a tax effective way of utilizing RRSP savings early in retirement.
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(Service Canada) (Service Canada) 4 Based on the Federal pension tax credit of $2,000 and Ontario pension tax credit of $1,337 3
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Additionally, as the income generated from a RRIF or annuity purchased with RRSP funds is eligible for pension splitting, individuals can potentially take advantage of their spouse or common-law partner’s pension tax credit as well, if not already used, by doubling the amount they take out and electing to split the income.
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