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Financial planning tips

June 09, 2011

Canada Pension Plan changes to meet boomer demands

Canada Pension Plan (CPP) is currently undergoing a six-year makeover to “better reflect how Canadians choose to live, work and retire.”

We knew it was coming. For years we’ve been hearing that the Canada Pension Plan (CPP) might run out before we do. While government officials maintain that the plan has enough assets to provide benefits, they are making some changes, with the realization that a wave of soon-to-be-60 boomers could be looking to start collecting benefits.

Say hello to the new CPP.

The six-year makeover began January 1, 2011, when the first of several changes took effect. According to the government, the new and improved – depending on your perspective, of course – CPP will “better reflect how Canadians choose to live, work and retire.”

In a nutshell, the changes will benefit anyone who chooses to start CPP benefits after age 65.

So how does this affect you? Like many Canadians, you may be counting on the CPP as a key part of your retirement income. You may, in fact, already be collecting CPP benefits.

Whatever your situation, the changes certainly raise some questions. Will this affect when you can retire? What does this mean if you’re already collecting benefits? When is the best time to start taking the benefits?

A closer look at the changes will give you a better idea of how they will affect you – and what decisions you may need to make. 

The early bird gets . . . reduced CPP

Revised adjustment factors will impact those wanting to start CPP income earlier and make it even more beneficial to take CPP after age 65. The reduction for taking CPP before age 65 will increase to 0.6 of a percentage point per month from 0.5. The enhancement for taking CPP after age 65 will increase to 0.7 of a percentage point per month from 0.5. These changes will be phased in as follows:

Monthly adjustment

Age CPP begins

2010

2011

2012

2013

2014

2015

2016 and after

60-64 -0.50% -0.50% -0.52% -0.54% -0.56% -0.58% -0.60%
65 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
66-70 0.57% 0.64% 0.70% 0.70% 0.70% 0.70% 0.70%

You can collect CPP while still working

Effective January 1, 2012, the Work Cessation Test will be eliminated. You will no longer need to stop working in order to qualify for CPP retirement pension. Any Canadians over age 60 will be able to collect CPP if they contributed to the plan while they worked.

If you choose to work while receiving CPP benefits

The Post-Retirement Benefit (PRB) takes effect January 1, 2012. Canadians who choose to receive CPP pension benefits and work will build up more pension benefits under this program. Workers are required to continue CPP contributions until age 65. They can opt to contribute until age 70 to further increase pension benefits.

Increased low-earnings period will likely increase benefit amount

Service Canada currently deducts the lowest 15 per cent of your earning years when calculating CPP benefits. They’ll increase that to 17 per cent in 2014.

For example, if someone works 47 years (18 to 65), 15 per cent is 7.05 years. At 17 per cent in 2014, the deduction would be 7.99 years, almost an extra year. If someone works 25 years, 15 per cent is 3.75 years, increasing to 17 per cent in 2014 or 4.25 years.

Helping you understand how these changes affect you

Just how much the CPP changes will affect you will depend on your work situation, savings and retirement goals.

Whether you’re still working and just thinking about retirement or already there, a great place to start is with the advice of an advisor.

It’s important to note that these changes won’t affect you if you started receiving CPP benefits before December 31, 2010, and if you don’t return to the workforce. The changes also don’t apply to Quebec Pension Plan benefits.

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