I think most Canadians are familiar with our national pension plans. We have the Canadian Pension Plan (CPP) that, if you are employed in Canada, you pay into. Right now you pay 4.95 per cent of any wage between $3,500 and $50,000 to a maximum of $2,300 per year.
This is matched by your employer.
You can collect CPP as early as age 60 and we usually see most people who retire at age 60 elect to take it early. There is a price for this, though. The current full pension is $1,012 a month at age 65, but for
every year that you take it early, you reduce the amount by approximately six per cent a year.
Taking a pension at age 60 you would see a 31.2-per-cent reduction — or a monthly benefit of $696.
One way to look at this is, without taking into consideration interest and inflation, is that your break-even point for taking CPP early is around age 82.
If you live past this you could argue that you will be better off waiting until age 65. Most people would agree that having an extra $700 a month in the first five years of retirement, when you can have more fun with it, is a better way to go.
As a note, you can postpone and even continue to contribute to CPP after age 65 and your
benefit will be higher than the current maximum.
Our other pension is Old Age Security (OAS). You can collect OAS if you have lived in Canada for 10 years or more after the age of 18. To get the maximum, you need to have resided in Canada for 40 years. The current maximum pension under this program is $550.
There is one thing that OAS has that CPP does not — “claw back.” If you make more than $71,000 a year during retirement, you start to get a reduction in benefits.
By the time you have made $115,000, you will see none of the benefits. Regardless of how you feel about the reduction in benefits at this income level, we still see it as a form of indirect taxation.
The other thing about OAS is that if you are under a certain age (currently 54) the age you can apply for benefits just became a little older (age 67). One of the positive changes the plan has made is that you can now defer the benefits. If you were to postpone your OAS until age 70, you would see a 36-per-cent increase in monthly benefits.
All of the pension and retirement decisions you make should be based on your personal circumstances and everyone will have a different outcome.
We use a tax-optimization page to determine the most effective way to take an income from your retirement savings and pension plans.
Les Consenheim is a financial adviser with Raymond James - Consenheim and can be reached at 250-372-8117 or les.consenheim@raymondjames. Raymond James Ltd. is a member of the Canadian Investor Protection Fund. This article is for general information purposes only. The views of the author do not necessarily reflect those of Raymond James. Individuals should seek professional advice prior to acting on any information referred to herein.