The average Canadian with the maximum Canada Pension Plan (CPP) benefit who is retiring this year can expect to lose $155,000 in lifetime income by taking CPP at 60, rather than delaying to age 70. (average life expectancy assumed).
This number doubles to nearly $300,000 for Canadians fortunate enough to live into their late 90s (not including CPP enhancements available to many Canadians).
Why do Canadians take CPP early?
If this is true, why do most Canadians elect to begin receiving their CPP benefit early? 95% of Canadians take their CPP at 65 or earlier. Less than 1% delay to age 70.
The reasons are many, some irrational (a bird in the hand argument), and some are rational, but fail to hold up to scrutiny. Psychology and emotions certainly play a role. In addition, some Canadians don’t realize they even have the option to enhance their CPP benefit by delaying uptake..
To review, Canadians can receive a 0.7% increase in their CPP benefit for each month deferred past 65 (42% increase for full 5 year deferral), and conversely, a 0.6% decrease for each month taken prior to 65 (36% reduction to take 5 years early).
Further, a recent study[1] asserted that the total increase from delaying is actually a bit higher (closer to 49% than 42%). This is because CPP payouts for those that have not started benefits are annually nudged higher by an amount tied to the 12-month trend in wages.
Is delaying a good deal?
The same study quantified the value one receives, in easy-to-understand terms, in exchange for delaying receipt of CPP. It stated that delaying CPP is essentially the purchase of an inexpensive, inflation-indexed and very secure defined benefit (DB) pension.
When a Canadian defers CPP, they are basically ‘purchasing’ additional pension (CPP) benefits in exchange for the forfeited CPP payments during the deferral period.
Let’s focus on those forfeited payments for a moment – what type of pension (or annuity) would you be able to purchase in the retail marketplace for an amount equivalent to those lost payments?
Answer – the marketplace would yield annuity payments 40% lower for a man, and 50% lower for a women. In other words, it would cost nearly twice as much to buy the same level of secure pension income in the retail marketplace!
Of course, everyone’s scenario is different. There are some Canadians who simply do not have sufficient savings (eg. RRSP/RRIF) to bridge the income gap. There are others who may have a limited life expectancy. However, data shows most Canadians would be able to afford to delay CPP for at least a year; more than 25% could delay for 10 years.
We would recommend reviewing this topic thoroughly with a financial planning professional, as there are lifelong financial consequences embedded in the CPP uptake decision.
If you have any questions, or would like more information, don’t hesitate to reach out.
[1] https://www.fpcanadaresearchfoundation.ca/media/5fpda5zw/cpp_qpp-reseach-paper.pdf
Connect Wealth is an independent financial planning firm that offers holistic advice to clients based on their current goals and future aspirations. We use well-established workflows and cutting edge technology to maximize planning efficiencies while simplifying the process for clients. Learn how you can maximize your financial opportunities at www.connectwealth.ca
De-Bunking Your Budgeting Barriers. If you don’t have a million dollars in your account right now, it is likely that you hate budgeting. It’s even more likely that you’re annoyed, even enraged, the moment the topic arises. It’s an interesting phenomenon, we all want to be financially successful, yet this first step is often the […]
The income sprinkling rules outlined in July 2017 held strong and the rules pertaining to passive investment income weren’t as harsh as predicted. Specifically, Budget 2018 has implemented two simple measures as it pertains to passive investment income:
Budget 2018 proposed to provide for an alternative reduction to the small business tax rate where a Canadian Controlled Private Corporation (CCPC) and its associated corporations have investment income in the year exceeding $50,000. The amount of the reduction is $5 for every $1 of investment income exceeding $50,000. In effect, the small business tax rate reduction disappears if passive income in a related business exceeds $150,000 in a fiscal year.
Currently, private corporations are entitled to claim a tax refund equal to $38.33 for every $100 of taxable dividend Where the corporation has a combination of regular business income (taxed at the regular business rate which does not include a refundable tax element) and investment income (taxed at the corporate investment rate which includes a refundable tax component), planning was commonly implemented to have the business income distributed by way of eligible dividend (taxed at a lower rate) while still being able to claim the tax refund.Budget 2018 proposes to modify the refundable tax regime to eliminate this planning and ensure that, in general, the private corporation is entitled to a dividend refund only when non-eligible dividends are paid.
There are ways to reduce the impact the business tax changes outlined within Budget 2018 through other financial strategies. These strategies may include Individual Pension Plans, Cash Value Insurance, as well as the strategic use of prescribed loans. We highly recommend contacting your financial advisor to determine which of these strategies will best suit your financial situation.
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If you have any questions on this taxes, or the different kind of impact it could have on you, please, do not hesitate to contact us!
Connect Wealth is an independent financial planning firm that offers holistic advice to clients based on their current goals and future aspirations. We use well-established workflows and cutting edge technology to maximize financial efficiencies while simplifying the process for clients. Learn how you can maximize your financial opportunities at connectwealthp.wpengine.com
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