It is a new year, and some of you may have just celebrated your 60th birthday or soon will be. With the excitement of this life milestone comes the option for you to begin receiving your pension benefits. But before you blow out the candles, and start cashing in, there are some important things you should know.
The Canada Pension Plan (CPP) provides retirement, disability and survivor benefits to individuals who have contributed to the plan and are at least 60 years of age. The amount that you will receive depends upon your average salary and the number of years you have contributed to the plan.
If you begin to receive CPP before the age of 65, the monthly amount you receive is reduced. Conversely, if you delay receiving CPP benefits until you are 70 years old, the monthly amount you will receive is higher. For example, if a person starts receiving CPP in 2013 at age 60, the monthly CPP would be approximately 32 per cent less than another person starting it this year at age 65. Further, if a person starts receiving CPP in 2013 at 70 years, then he/she would receive approximately 42 per cent more than a person starting this year at age 65 would.
Service Canada's website has a CPP calculator to help you determine what age to start receiving CPP is best for you. It will take into account your life expectancy, expected rates of return and inflation effects. By working with your accountant or financial advisor, he/she can also help you make the choice that best suits your needs.
Once you decide at what age you will apply, you should allow for six months, for the application and approval process, before you start receiving your benefits.
Effective 2012, you can still work and receive full CPP benefits, but if you are under age 65, still working and receiving CPP benefits, you and your employer are required to continue to contribute to CPP. Between ages 65 and 70, continuing to contribute is voluntary, although continuing to contribute can result in higher benefits later.
A husband and wife can share their CPP benefits. Therefore, it may be possible to tax a portion of the benefit in the lower income spouse's hands, which can result in lower taxes. If the marriage ends, CPP rules also allow a split of CPP credits that spouses have accumulated during the time they lived together to otherwise equalize their credits, even if one spouse did not contribute to the CPP. An application must be made to Service Canada and complex rules must be navigated properly.
There is also something called the CPP Disability Benefit, which is a benefit payable to an individual under the age of 65 that has made CPP contributions for a prescribed number of years, has a disability that is both "severe" and "long term," and has stopped working because of the disability.
The CPP Survivor Benefit is a three part benefit consisting of the following:
- a lump-sum survivor benefit of up to $2,500;
- a monthly survivor pension paid to the spouse; and
- children's benefit.
Finally, if you live outside of Canada, there is a non-resident withholding tax of 25 per cent on CPP payments. This is subject to any tax treaty deductions or special elections filed.
About the Author
Steve Brown is a senior manager in Crowe Soberman's Audit & Advisory Group. He is experienced working with both public and private companies.
This article was originally published in the Comments Winter '14 Issue.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
