Timing critical when jumping on the CPP bandwagon

You can start collecting your Canada Pension Plan benefits as early as one month after you turn 60 or as late as age 70. Many people claim that since there is no best-before date on your birth certificate and no one really knows how long they have to live, it is better to take your CPP as early as possible. After all, you’ve been paying into CPP, most likely, since you were 18 years old. However, actuarial tables show that the average life expectancy for Canadian males is really 80 and females 84.

It probably makes a great deal of sense to pull the trigger early if you have health issues that could seriously affect your longevity.

However, there are financial implications to taking your CPP at age 60. For each year you take CPP before the age of 65, your payments drop by 7.2 percent a year for a total of 36 percent if you begin claiming it at age 60. That drop doesn’t disappear once you turn 65 — it is a permanent lowering of your income.

The good news is that by taking your pension at 60 you will make as much money as the person who takes it at 65 by the time you both reach 74, after which time the other person starts to pull ahead. Another reason for taking your CPP early is that as a younger person you may be able to enjoy the funds more than you otherwise would in your older years.

If you are feeling confident about your health and wait until you are 70, you increase your payments by 8.4 percent per year or 142 percent of the amount you would have received at age 65.

So, remember, if your health is not a concern and you have sufficient other sources of income for support, you might not need early CPP payments. But that means you might deplete your Registered Retirement Saving Plan, Tax Free Savings Account, or other savings faster if don’t take your CPP. And remember, your RRSP savings are taxable at your marginal rate. It’s also not that easy to find investments that produce more than an 8.4 percent bump per year and you certainly won’t get that from a bank savings account.

Some people take CPP early because of a concern that the CPP won’t be around for them to collect later because of worries about government raiding the fund or other mismanagement.

At one point in time that concern might have been valid when the pension contributions actually formed part of the government’s general funds and the plan was actually underfunded.

In 1997, the government established The Canada Pension Plan Investment Board to manage the fund as a separate arm’s-length crown corp. It manages more than $400 billion in investment assets. It is audited by an independent actuarial firm, which stated that the fund is conservatively sustainable for the next 75 years.

Grant Diamond is a tax analyst in Saskatoon, SK., with FBC, a company that specializes in farm tax. Contact: fbc@fbc.ca or 800-265-1002.

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