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Retirement savings

March 06, 2013

Unretirement and the Canada Pension Plan

The federal government is implementing CPP changes that will show up in this year’s tax form packages. Not surprisingly, they reward late retirement.

A recent interview with tax expert Evelyn Jacks included good advice on the impact of key life and financial events on tax planning. Retirement qualifies as one of those, obviously. Jacks explained to me that the federal government is introducing a series of changes to the Canada Pension Plan (CPP) that reflect the move toward unretirement among the country’s baby boomers. We’ll see some of these changes in our 2012 tax form packages.

“Pre-retirees need to know that the way we contribute to the Canada Pension Plan changed in 2012,” Jacks told me. “If you’re thinking about working past age 60, even if you have started receiving CPP benefits, you and your employer will be required to continue to make CPP premium payments until the end of the year in which you turn 64. You can opt out of that requirement if you continue to work and are at least age 65 and up to age 70. The good news is that these additional premiums will go into your Post-Retirement Benefit account, thereby increasing your eventual pension benefits. The bad news is that there is an additional step for working seniors if they wish to stop contributing at age 65. You must proactively opt out. Employees will use Form CPT30 to do so; while the self-employed will use Schedule 8 on the personal tax return, which you will see in your 2012 tax package.”

Here’s a summary of the changes:

  • You’ll earn more than ever if you retire after your 65th birthday. Previously, Canadians working past 65 saw a 0.5% boost in their CPP retirement pension for every month they delayed retirement. It amounted to an annual increase of 6% for every year you worked past 65. That percentage has been increasing since 2011. In 2013, the reward will be a 0.7% increase for every month you work past 65. Annually, that’s 8.4%. “According to the government, from 2011 to 2013, if you start receiving your CPP pension at the age of 70, your pension amount will be 42% more than it would have been if you had taken it at 65,” said Jacks.
  • Early retirement will hurt more than ever. Similarly, the percentage decrease applied to the CPP retirement pension awarded early retirees is on the rise. Canadians who retire before 65 used to suffer a 0.5% decrease in their CPP pension multiplied by the number of months they retired early. That penalty is moving up gradually, and will reach 0.6% per month in 2016.
  • If you’re under 65 and receiving a CPP retirement pension while working, you have to continue making CPP contributions. So does your employer. This didn’t use to be the case. The contributions support a new Post-Retirement Benefit that will add to your retirement income. This change was implemented last year.
  • If you’re between 65 and 70 and receiving a CPP retirement pension while working, you can decide whether or not to make CPP contributions. That wasn’t an option previously. If you make the additional contributions, your employer has to as well. Again, this adds to your Post-Retirement Benefit. This change was also implemented last year.
  • More of your lowest-earning years will be dropped from your CPP retirement pension calculation. Service Canada’s general drop-out provision removed 15% of your lowest earnings, meaning that as many as seven of your lowest-earning years were pulled out of its calculation of your CPP retirement pension. In 2012, the percentage rose to 16% (7 ½ years). In 2014, it’ll go up to 17% (eight years).
  • The work cessation test is a thing of the past. Canadians retiring early used to have to stop working or see a significant income cut for two months before they could take their CPP retirement pension. That was waived last year. You can now take a CPP retirement pension as early as age 60 without passing the work cessation test.

“These changes are very important from the point of view of pre-retirement planning and retirement income planning because we have a new window of time around which we can think about accelerating RRSP meltdown strategies: age 60 to 70,” said Jacks. “We may also want to consider family longevity and whether postponement makes sense at all, in the cases of significant health issues. Some people may wish to take the CPP benefit and contribute it to extra health or homecare coverage; or in the case of couples, ask their financial advisor about life insurance policies or annuities that feature a ‘joint last to die’ option. The CPP benefit provides an un-indexed lump-sum death benefit of only $2,500. In addition, when your spouse dies, you may expect to receive your full CPP retirement pension and your spouse's as a survivor benefit, too. Unfortunately this is not so. The combined survivor and retirement pension will max out at a single maximum possible retirement benefit.”

The CPP is designed to pay you the equivalent of about one-quarter of what you earned, on average, during your career. There’s a maximum pay-out, which is set each January. The maximum retirement pension set in January 2013 for retirement at 65 is $1,012.50 per month.

Jacks published her 49th and 50th books recently: Essential Tax Facts: Secrets and Strategies for Take-Charge People and Jacks on Tax, Your Do-It-Yourself Guide to Filing Taxes Online.

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