On December 15, 2009, several changes to the Canadian Pension Plan (CPP) recommended by the federal, provincial and territorial governments became law with the passing of Bill C-51.
The new rules will gradually restore the pension adjustments for early and late CPP take-up, remove the work cessation test, mandate plan participation for working beneficiaries under age 65 and enhance the general drop-out provision.
These new changes will be gradually phased in over five years starting in 2011.
However, the changes will have no impact on you if you are already receiving a CPP retirement pension, disability benefit, survivor benefit or combined benefits, or if you will begin to receive these benefits in 2010.
Once the new changes come into effect for early CPP take-up, if you are between the ages of 60 and 65 and plan to apply for a CPP pension early your benefits may be reduced.
Below are the details of these changes, including when they come into effect.
Pension adjustments for early and late take-up
Early take-up — Currently if CPP is collected early, your CPP pension benefit is reduced by six per cent per year or half a per cent per month for each month that the pension is taken before your 65th birthday to a maximum of 30 per cent over five years.
In the future for early CPP take-up, there will be a reduction in benefits by 7.2 per cent per year or 0.6 per cent per month for each month that the pension is taken before age 65 to a maximum reduction of 36 per cent. This increase will be implemented gradually over a five year period beginning in 2012.
Late take-up — Currently if CPP is not collected until after age 65, your CPP pension benefit is increased by six per cent per year or half a per cent per month up to the age of 70 to a maximum of 30 per cent over five years.
If you wait until age 70 you will receive an increase of 30 per cent of your basic CPP benefit. In the future for late CPP take-up, there will be an increase in benefits by 8.4 per cent per year or 0.7 per cent per month for each month that the pension is taken after age 65 and up to the age of 70 to a maximum increase of 42 per cent. This increase will be implemented gradually over a three year period beginning in 2011.
Removal of work cessation test for early CPP take-up — Currently before 2012, in order to apply for CPP benefits early, from age 60 to 64, you must either stop working by the end of the month before your CPP retirement pension begins and during the month in which it begins, or your earnings must be less than the current monthly maximum CPP retirement pension benefit in the month before your pension begins and in the month it begins.
In the future, starting in 2012, the requirement to stop working or significantly reduce your earnings to take-up early CPP will no longer apply.
Mandatory contributions to CPP for CPP pensioners under age 65
If you are under age 65 and are receiving your CPP monthly pension and continue to work, you and your employer are required to continue to contribute to CPP. If you are between the ages of 65 to 70 collecting a CPP pension and continue to work, the decision to continue to contribute to the CPP is voluntary so you may elect not to make CPP contributions. However, if you opt to participate in the CPP your employer will be required to also contribute. These contributions will result in increased retirement benefits.
Increase in general low earnings drop-out
As part of your CPP benefit calculation there is a general adjustment in the calculation that allows for a “drop out” of certain periods of low or no income.
Currently the general drop-out provision is 15 per cent of the years where your earnings are low or nil.
In the future the general drop-out provision will increase to 16 per cent in 2012 and 17 per cent in 2014.
In summary, if you plan to start receiving early benefits under the CPP between the ages of 60 and 65, and if you apply for benefits in 2012 or later, the new changes could reduce the benefits you will receive.
This may influence your decision on whether to take a CPP pension early.
Remember to consult your financial advisor before taking any action.
Written by Stuart Kirk, CIM.
Stuart Kirk is a Retirement Planning Specialist with Precision Wealth Management Ltd. The opinions expressed are those of the author and may not necessarily reflect those of Precision Wealth Management Ltd. For comments or questions Stuart can be reached at stuart@precisionwealth.ca or 250-954-0247.
