Delaying Your Canada Pension Plan Benefits Until Age 70 Can Make a Big Difference

The Canada Pension Plan (CPP) aims to give people a reliable source of retirement income. But in these challenging economic times, when higher interest rates and nagging inflation keep pushing up the cost of living, Canadians might be tempted to claim their CPP benefits before the typical retirement age of 65. A smarter move: Delay your benefits until 70 so you can enjoy a significantly higher payout.

Just how big a difference do a few years make to the bottom line, and how can people choose the starting age that’s best for them? We asked two experts: Marlene Buxton, principal fee-only financial planner at Buxton Financial For Retirement in Toronto, and Annie Kvick, an advice-only financial planner with Money Coaches Canada, based in North Vancouver.

  

How CPP Works

 

CPP is a monthly taxable benefit that helps people replace income when they retire. Unlike many other pension plans, it’s indexed to inflation. If you qualify for CPP, you will receive it for the rest of your life. The price of admission: You must have made at least one valid contribution to CPP. Contributions can come from work you did in Canada, or via credits from a former spouse or common-law partner. You must be at least 60 to begin claiming but can wait until 70: Your monthly payout is based on your average earnings, your contributions and the age when you start drawing CPP. 

 

It Pays to Delay

 

“If you start receiving the CPP pension earlier, the amount that you get every month will be smaller,” Kvick explains. “If you delay it and start as late as 70, then it goes up, but there’s no benefit of delay past 70 because it doesn’t go up thereafter.”

If you are financially able to put off CPP, the wait is well worth it. In 2023, the maximum monthly CPP payout at age 65 was $1,306 per month. If you start receiving it at 60, that number drops by 36 per cent, to just $835. But from 65 to 70, the payout rises by a healthy 42 per cent. “The maximum is actually $1,854 per month at age 70,” Kvick says. “That’s a big difference.”

Delaying until 70 “is the absolute easiest way to get more pension income in retirement for anyone that’s worked,” Buxton observes. That extra money adds up over decades. “If someone lives even past their late 70s, they’re already ahead of the game,” Buxton says. “And you imagine a person living into their 90s – with that increased benefit, it’s a significant amount.”

 

Plan Ahead

 

“Careful planning is important to making sure that you know exactly where you stand financially leading up to retirement, how much you can spend and how to create the income,” Kvick says. “Where’s the money going to come from to work the best for you?”

A big factor in deciding when to start CPP is your longevity. “If someone thinks, ‘If I make it to 80, that’s all I can hope for,’  they might want to take it at 65,” Buxton says.

Don’t delay CPP until 70 if it causes financial hardship, Buxton stresses. “If someone needs the money at 65 and it makes a bigger impact on their cash flow, then 65 is not a terrible time to take it,” she says. “You just don’t get that extra benefit by delaying.”

Most of Kvick’s clients apply for CPP at 65 or older, but each person’s situation is different, she notes. Some will rely more on CPP and Old Age Security (OAS is an income-based government benefit available to those who have turned 65) to form a bigger portion of their retirement income than others. Those who choose to delay CPP until 70 might meet their cash flow needs by working, Buxton says. But others will use RRSP income, other registered assets or another pension to fill the gap.

For some, taking CPP early so they can invest it is an attractive option. But as Buxton points out, in retirement the idea is to reduce your overall risk so you don’t worry about your money and have a base level of pension-type income with CPP. “Then you’re not so much at the mercy of the markets.” That “peace of mind” allows people to “enjoy retirement a lot more,” she adds.

Remember that CPP retirement benefits are considered income and the Canada Revenue Agency will want its share. Ask a financial planner to calculate the tax implications of claiming early versus later.

 

Considerations For Couples

 

As a couple approaches retirement, one person could start collecting CPP while the other holds off to build up more benefits, Buxton says. “It doesn’t have to be all or nothing.”

Still, there is strength in numbers for couples who might lack a work pension and don’t want to spend their retirement fretting about stock market investments. “By delaying the CPP from 65 to 70, especially if it’s a couple and they’re both delaying, it gives a really good cushion, a good base level of guaranteed income indexed to inflation, just like a company pension, for their lifetime,” Buxton says.

For couples, tax and survivor estate planning can be crucial, Kvick emphasizes. If both people expect to live a long life, such planning doesn’t matter so much. “But if someone has a shorter-than-average life expectancy, then the timing when to start taking the pension is important,” Kvick says. That’s because if your spouse passes away and you’re already collecting full CPP, you aren’t entitled to anything from their pension. But if you’re receiving less than the maximum, you can claim a survivor benefit.

 

Maxing Out

 

A tip from Buxton: If you’re 65 and are still working but haven’t hit the maximum CPP benefit, keep contributing until 70 to reach that target while deferring (and increasing) your payout. “Those years you’re working and maxing out the CPP contributions, you’re actually replacing earlier years where there would have been a lower number or a zero in contributions.”

Some people opt to spend the bulk of their retirement income in the first 10 to 15 years so they can enjoy it while they’re still young and healthy, Kvick says. She encourages them to consider first using alternatives to CPP, such as OAS, RRSPs, tax-free savings accounts (TFSAs), non-registered investments, rental income and work pensions. 

“You have all these assets in your backpack,” Kvick says. “Just because you want to spend money early does not mean you should pull your CPP early.” By making sure your assets are maximized and optimized so they last longer, Kvick adds, “you can actually spend more money long-term than [if you had pulled] your pension.” 

A version of this article appeared in the Feb/March 2024 issue with the headline ‘Choose the Moment’, p. 32

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