On January 1, 2012 new Canada Pension Plan rules came into effect. The new rules will transition over the next five years. The most significant changes are as follows:
- If you take an early CPP pension at age 60, rather than waiting to 65, your monthly payments will be cut by 36% (vs 30% in the past).
- If you delay taking your CPP pension to age 70, your monthly payments will be 42% higher (vs 36% higher in the past).
- If you are under 65 and continue to work while receiving your CPP pension, then you and your employer will have to make CPP contributions. However, these contributions will increase your future retirement benefits.
- If you are aged 65 to 70 and continue to work while receiving your CPP pension, then you have the choice to contribute to CPP to increase your future retirement benefits.
- Under the old rules you had to stop working to collect early CPP. Now you can receive CPP pension without any work interruption.
The decision as to whether to take early CPP has always been somewhat controversial. The goal of the new rules is to keep older workers in the workforce longer by enhancing the payout for those who receive their CPP later vs earlier, but one’s decision should still be based on personal circumstances.
If you knew that you were going to die at age 65, you would definitely start collecting your CPP pension at age 60 and get 5 years pension in hand. Conversely, if you were sure that you would live well into your 90s, you would certainly wait until age 70 to collect a pension that is 42% higher than if you started receiving it at age 65.
A mathematical rule of thumb is that age 75 is the break-even point. If you don’t expect to make it to age 75 then start collecting it early; otherwise, take your CPP pension at age 65, unless you are highly confident of reaching well into your 90s. However, there are a few other factors to consider before making the final decision:
- Have you maximized your CPP entitlement by contributing over your working life? From an overview perspective, if you have not contributed for at least 40 years from the age of 18 then you won’t get the maximum CPP pension. Consider obtaining your CPP Statement of Contributions report by contacting Service Canada.
- What tax bracket do you expect to be in from aged 60 and later?
- If you take an early CPP Pension, and if you don’t really need the money, contribute to room in your TFSA, RRSP or other investments to provide a future nest egg.
- Consider if taking the CPP Pension will increase your exposure to the Old Age Security clawback (commencing at $67,668 net income in 2011).
- As a business owner, you are responsible for paying both the employee and employer portion of CPP. In 2012, the maximum contribution will be $4,613.40 ($2,306.70 for each of the company and the employee). However, you are only required to remit CPP payments if you draw a salary. If you were to pay yourself with dividends, you would not be required to pay the $4,613 in CPP premiums. In addition, dividends are taxed at a lower personal rate than a salary at the top marginal rate resulting in further personal tax savings. There may be overall corporate/personal integrated tax and employer health tax savings by paying dividends vs salary. However, there are some consequences to paying yourself with dividends rather than a salary:
- RRSP contribution room is calculated based on ‘earned income’ which does not include dividends. Therefore, if you would like to continue contributing to your RRSP and you do not have any contribution room from prior years, you may want to continue drawing a salary.
- The amount of CPP you will receive is based on the amount you pay into the plan. So, if you stop drawing a salary and no longer remit CPP payments, you may receive smaller pension payments upon retirement.
Each situation is different, and to make an informed decision it is important to consider your retirement goals and current savings as well as your current CPP situation. For a thorough analysis, please contact your Cunningham partner.