If you are soon to retire, one of the lifestyle and financial choices facing you is the question of when to start receiving your Canada Pension Plan (“CPP”) retirement pension. With some restrictions, you may start CPP as early as age 60 and as late as age 70, although the amount of pension you will receive, for life, will depend upon the start date that you select.

Using a person’s “regular” age 65 pension as a base line, starting CPP  ”early” will result in a reduction of the pension by ½ of 1% for each month prior to age 65 that the pension begins. A person who would normally receive $600 a month if she started CPP at age 65 would receive $564 a month (94% of $600) if she started the pension at exact age 64 – 12 months early. If she started the pension as early as possible – age 60 – she would receive $420 a month (70% of the $600 “regular” age 65 pension).

On the other hand, delaying taking the pension until after age 65 will result in an enhancement of the “regular” age 65 pension of ½ of 1% per month that the start of the pension is delayed. So, if our pensioner delayed starting her pension until exact age 66, she would receive $636 a month (106% of $600). And if she started her pension as late as possible – age 70 – she would receive $780 a month (130% of the $600 “regular” age 65 pension).

So which is the better choice?

Well, using our pensioner above, and ignoring any interest that could be earned if the pension payments were invested, if she started her $420 monthly pension at exact age 60 she would have, for example, received $80,640 in benefits by the end of the year she turns 75. If she had waited until age 65 to apply, and received her “full” $600 monthly pension, she would have received $79,200 in benefits by the end of the year she turns 75. In other words, if she waited until age 65 to start CPP it would take her a little over 11 years to catch up and then she would be ahead of the game after that, receiving a monthly pension of $600 instead of the reduced pension of $420.

Waiting to age 70 to start the $780 pension, it would take our pensioner to age 80 (if she lives that long) to receive $102,960 in total benefits, about the same as she would have received ($105,840) by that age had she started the pension at age 60. Again, it would take her over 11 years to catch up. And in relation to starting at age 65, it would take a pensioner starting at age 70 until age 86 to catch up!

So the “right” answer about when to start is based on a combination of how much you need the income and how long you expect to live. In most cases, it makes sense to start early.

The rules are somewhat complex and other factors must also be considered. To find out more about CPP retirement benefits, you can contact our office and speak to one of our advisors.

Pension or life income fund (LIF)

Before you retire from a company that offers a pension plan, you’ll need to decide whether to leave the pension with the company or take it with you (called “commuting”). If you decide to commute the pension, it will have to be transferred to a life income fund (LIF) if it’s locked in. If you decide to keep the pension with the company, you would begin to receive income payments at retirement as defined by the plan.

But deciding which one can be difficult because not everyone fully understands his or her options.

Some are drawn to keeping the pension with the company because it represents stability of income (pensions offer you a regular and guaranteed income for life). Some employees fear they won’t have enough income, even if they’re unsure how much is enough. So by keeping assets in a company pension plan, it can offer some a sense of security. How much income you receive will depend on a number of factors: How long you’ve been a member of the plan, your average gross earnings, your age at retirement, to name a few.

On the other hand, you could choose to commute your pension to a LIF. Unlike a company pension, a LIF allows you to choose what to invest in, offering more flexibility with your investment decisions. LIFs are also designed to help you not run out of money because they legislate how much you can redeem each year – there’s a minimum and maximum amount you can take as income. How much income you receive will depend on how much you commute to the LIF, how much you redeem each year and how well the investments inside the plan perform.

If you’re unsure which option is the right one, ask yourself:

·         Am I worried I won’t have enough to live the lifestyle I want in retirement?

·         Do I have other sources of retirement income, such as personal savings (e.g. registered retirement savings plans)?

·         Am I concerned commuting my pension to a LIF will make managing my money more complicated?

·         Am I worried about taking control of my assets?

·         Is there comfort in having a stable and reliable income or do I want the opportunity to grow my assets?

If you’re still unsure, consider commuting your pension to a LIF rather than taking the pension. Taking a pension means you’re locked in to that decision. There is no opportunity to transfer it later. By commuting it to a LIF first, you can still later decide you would prefer a guaranteed income and then use your LIF to purchase a life annuity.