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Collecting CPP while still contributing goes against expert advice


CALGARY — Canadians can begin collecting Canada Pension Plan payments as early as age 60, but financial advisers warn it rarely makes sense to do so.

And there are even fewer reasons to start drawing retirement funds early when you're still working.

Contributors to Canada's national pension plan can elect to start receiving benefits as early as age 60. If they are still working, they must continue to contribute to CPP until age 65, at which time they have the option to stop or to keep paying in until age 70.

CPP beneficiaries who continue to work and chip into the pension fund earn what's called a post-retirement benefit.

"I don't advise taking CPP until you're actually retired," said Willis Langford, retirement income and investment planner at Langford Financial in Calgary.

"I think the government benefits like CPP and Old Age Supplement form the very base of a retirement income plan and you shouldn't tap into it until you're ready to start accessing all of your sources of income in retirement."

Even so, in 2018, there were 658,000 CPP beneficiaries who worked and contributed to a post-retirement benefit, which they received the following year. That's about 12.6 per cent of the 5.2 million CPP beneficiaries.

The math, according to figures supplied by Employment and Social Development Canada, favours waiting.

If you start collecting CPP at age 60, instead of the usual 65, your monthly benefit will be reduced by 36 per cent (0.6 per cent for each month for each month before you turn 65). If you wait until 70, your benefit will increase by 42 per cent compared with age 65 (0.7 per cent for each month).

A long-term contributor who earns $50,000 per year could be in line to receive about $897 per month or $10,760 per year if he waits until age 65. He would get just $551 per month — about $6,600 per year — if he starts at age 60.

If he continues to work, he would have to pay about $2,300 a year in CPP contributions.

Five years of accumulated post-retirement benefits will boost his CPP income but it will only rise to about $658 a month starting at age 65 (ignoring increases due to inflation and enhancements).

On the other hand, if the same person works until age 70 while contributing to CPP and doesn't start benefits until then, he would earn $1,422 per month.

So why do some people start their CPP as soon as possible?

"If you knew you were going to live for a very, very long time, generally you would wait. The longer you wait, the more you would get," said Brad Goldhar, senior vice-president, senior investment adviser and portfolio manager for BMO Private Wealth.

"But if you knew at age 60 that your family history suggested not many years of longevity, you might take it early."

In other words, taking a smaller amount of CPP after years of contributions is better than not living long enough to get any payback at all. Some people would rather have the money while they're young and healthy enough to enjoy it.

Some start collecting their CPP early because they have no choice, Goldhar said. They've been laid off or are working part-time or have big debts to pay down and there's no other source of income.

Some retirees grab CPP as early as possible because of worries that the plan might not be around in later years, although the analysts say such fears are unfounded.

Those who are concerned about their longevity may start CPP early to provide needed income without having to touch their other savings, thus leaving an estate for their heirs, Langford said.

There are tax considerations to taking CPP early because it is taxable income that could boost your tax rate. Alternatively, as a pension, it can be shared between spouses to reduce tax rates.

Taking CPP too soon could increase net income and lead to a greater clawback of Old Age Security, which you can begin receiving at 65.

The situation is complex enough that decisions on CPP should be part of a comprehensive retirement income strategy, arrived at after careful planning and with proper professional advice, analysts say.

Eventually, if you live long enough, waiting will bear fruit.

"If you take three people aged 60, 65 and 70, all taking their CPP at that time, the break-even points are between age 74 and age 76," said Langford.

"The person who waited until age 70 is going to get far more if they all live to be 90."

This report by The Canadian Press was first published March 12, 2020.

Dan Healing, The Canadian Press

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