Q&A: CPP benefits

Question: I understand my CPP benefits are calculated based on my wages (and CPP contributions) between 18 and when I start to collect CPP, and that I can deduct 15% of my lowest income years which I estimate is 6-7 years. Well, I spent six years in school until age 24 (with a low student income) and now I am considering retiring early, possibly at 57 or 58.

So if I delay taking CPP past 60 do those extra years result in decreased CPP benefits? Say I start collecting at 65, then my income for CPP would be low or zero from 58 to 65 or seven years. Therefore, there seems to be a benefit to me taking CPP at 60 rather than later if I am not working. I have no pension from work and will live off my savings. – (Name withheld by request)

Gordon Pape answers: According to the CPP website, a person’s contributory period starts at age 18 “and continues until you begin receiving your retirement pension, reach age 70 or die (whichever is the earliest)”. This means if you retire at, say, 58 and delay applying until age 65, you will have seven years of zero employment income and zero contributions, assuming you don’t work during that period. That will certainly have the effect of reducing your CPP retirement benefit.

What I cannot say with certainty is whether you would end up receiving a smaller pension than if you began drawing at age 60. Starting next year, the government will gradually increase the penalty for applying for benefits before 65. Until now, it has been 0.5% for each month prior to your 65th birthday, for a maximum of 30%. From 2012 to 2016, this will gradually increase from 0.5% to 0.6% per month. This means that by 2016 if you start receiving CPP at the age of 60 your pension amount will be 36% less than it would have been if you had taken it at 65.

You may wish to contact CPP directly to ask how the numbers will work out in your case.

Do you have a money question you’d like to ask Gordon? Send it along and then check out our Q&A section regularly to see if it was chosen for a response. Sorry, we cannot send personal answers.

Photo ©iStockphoto.com/ kzenon