We are well on the way to the implementation of the latest round of revisions to the Canada Pension Plan, with a host of revised rules and rates being phased in between 2011 and 2016.
Next month will be a particularly important juncture with the elimination of the work cessation test and the beginning of increased penalties for early pension take-up. Taken together, these changes should have would-be CPP pensioners conscientiously reflecting on their newfound flexibility.
Recap of the CPP changes
A more detailed rundown of the changes appeared in the March 2010 Tax & Estate Matters article, but they are in brief:
- Increased monthly penalties/premiums for early/late pension commencement
- Elimination of the work cessation test
- Premium payment obligations and opportunities for working CPP pensioners
- Improved pensions overall, due to an increase in the low earnings dropout years
Early and late take-up schedule
It is important to note first that one must apply for a CPP pension; it does not automatically start paying. A pensioner may elect to begin as early as age 60, with full CPP pension entitlement in the birthday month at age 65. A delay beyond that date to as far as age 70 will result in a premium top-up to the pension.
The exact amount of the pension will depend on premiums paid (and thus credits earned) by the person during working years. The 2011 monthly maximum at 65 is $960, with the average of all pensions actually being $512 as of June 2011.
Until these most recent revisions, the monthly penalty/premium for early/late take-up was 0.5% per month. These will both increase on the following schedule*:
<2011 2011 2012 2013 2014 2015 2016
Early penalty 0.50% 0.50% 0.52% 0.54% 0.56% 0.58% 0.50%
Late premium 0.50% 0.57% 0.64% 0.70% 0.70% 0.70% 0.70%
*Footnote: The Quebec Pension Plan will also adjust its early take-up penalties (2014 0.53%, 2015 0.56%, 2016 0.60%) and late take-up premium (2013 0.70%), but at present the work cessation test remains in place.
Work cessation test – A closer look
The work cessation test requires/ed that an individual earn less than the current monthly maximum CPP retirement pension payment (again, $960 in 2011) for the month prior to and the month of pension commencement. By the time you are reading this, that test will effectively be an historical footnote.
As of January 2012, one may apply for the CPP pension irrespective of current or future income. To allow for processing time, the government recommends that the application be submitted six months prior to the month that the pension is to commence.
Tempered flexibility
There is no question that the elimination of the work cessation test opens accessibility and paves the way for flexibility as to when and how a CPP pension may be taken. Still, pensioners must consider their options carefully.
As we look in the rearview mirror at the old penalty provisions, early take-up at age 60 meant a (lifetime) pension at 70% of what would otherwise have been available from age 65. By 2016, the per-month penalty of 0.6% will push that down to 64% of the full entitlement. That’s a haircut in excess of a third of full entitlement. For those in ill health, early take-up may indeed make the best sense, but for those with long genes it could be a recipe for later life financial distress.
Ultimately, it remains a very personal decision, not one that is dictated by spreadsheet figures alone. No doubt the easy availability of that cash supplement will be very hard to resist for many, and accordingly this is one of those times when a good financial advisor can earn his or her stripes by fairly presenting the options and implications, so that an informed decision may be made.