Changes to CPP & OAS

Changes to CPP & OAS

Canada Pension Plan (CPP) Rules

In January of 2012, the government changed the rules for both taking and contributing to CPP. What follows are a few highlights.

Taking CPP Early

The normal retirement age for CPP purposes is 65; however, the government allows Canadians to take their CPP up to five years early. The catch used to be that they would reduce your payout by 0.5% for every month you took it early. If you took CPP at age 60, they used to reduce your monthly payment by 30% (60 months x 0.5%) throughout your retirement years. In January of 2012, however, they changed the rules and, for those taking CPP early, began phasing in increased reductions from 2013 – 2016. By 2016, at age 60 the pension amount will be 36% (0.6% x 60 months) lower than if you take it at age 65 in 2021.

Taking CPP Later

Conversely, the government also allows you to start taking CPP up to 5 years later. In this scenario, they will add 0.7% for each month you delay taking CPP. For example, if you wait until age 70, you would be entitled to monthly benefits a full 42% (0.7% x 60 months) higher than if you had taken it at age 65.

With these new penalties for taking CPP early and increased benefits for taking CPP later, the government is, in essence, encouraging Canadians to delay retirement.

What to Do

The decision of when to start taking CPP should be taken very seriously as it will affect your income for the rest of your life. Of course, one of the biggest considerations depends on your estimated life expectancy. Researchers say the breakeven point is somewhere in your mid to late 70s, after which taking an unreduced pension at age 65 would have been more beneficial than taking a reduced one at age 60. Naturally, there are other considerations such as quality of life, whether or not you need the extra income at age 60,the decision of when to actually retire, etc. All calculations are based on life expectancy, which cannot be controlled.

New Requirement to Pay Until Age 65

If you decide to take CPP early and you are still working, you are required to continue to pay into it until you reach age 65. Previously, you could not pay into CPP and collect it at the same time. Once you reach age 65, however, you can elect to stop paying into CPP. Remember that the more you pay into CPP, the more you will benefit from it during your retirement years. You will have the option to continue to pay into CPP until you reach age 70. Any money you contribute to CPP after age 60 is now called the Post-Retirement Benefit (PRB).

No Need to Stop Working

It used to be that you actually had to stop working (income from either an employer or self-employed income) for at least two months in order to collect CPP. The government has now eliminated that rule.

Old Age Security Pension (OAS) Rules

Old Age Security pension is a monthly payment available to most Canadians 65 years of age and older who have met basic residency requirements. Employment history is not a factor in determining eligibility for OAS. You can receive OAS even if you have never worked. You simply have to have lived in Canada for at least 10 years after turning 18 years of age. If you are a Canadian citizen living outside Canada, you must have lived in Canada for at least 20 years after turning 18 years of age.

Unlike CPP, you cannot take OAS pension early. Also unlike CPP, OAS is income-tested each year. If your income is too high, benefits can be clawed back, requiring repayment on tax filing.

OAS Claw-Back

Unlike the CPP pension payments, the OAS payments are income-tested each year when you file your personal income tax return. This makes sense, as you do not have to pay into OAS each year while working. For 2014, OAS will begin to be clawed back at 15 cents for each dollar your net income exceeds $71,592 (indexed for inflation each year). When your income level reaches $115,716 (indexed for inflation each year), OAS is completely clawed back. If you are nearing age 65, there is no point in applying for OAS if your income exceeds the claw-back maximum income of $115,716.

Deferring Your OAS

As of July of 2013, you can defer receiving your OAS pension for up to 60 months after the date you become eligible. In exchange, your monthly pension payment will be increased by 0.6% for each month you delay receiving it. So this additional benefit can be increased by as much as 36% (0.6% times 60 months) if you delay receiving it until age 70.

Severance Pay and Retiring Allowances

As you approach retirement, many employers offer their long-term employees a severance package and/or retiring allowance. You may be eligible to transfer some of these amounts directly to your RRSP. This depends on a number of factors, including how long you have worked for that particular employer, how much RRSP room you actually have left and other factors. It is absolutely imperative that you have someone at TPC Financial review this paperwork before you submit any preferences or decisions to your employer’s payroll department as there can be substantial tax implications if handled incorrectly.

Need help with CPP & OAS Decisions?

These are critical financial decisions which will impact the rest of your life. We can help you make these decisions and we can help you with the paperwork. Give us a call!