Many people know by now that the federal government passed a law in 2011 (Bill C-51) which affected how the Canada Pension Plan (CPP) is calculated.
But what many don’t know is how it may affect them.
If you’re like me and planning on retiring relatively early, this will definitely have an effect on you.
Early Election Penalty
Any Canadian eligible for the Canada Pension Plan (about 95% of us are) can start to receive it when they turn 60, even though the government bases their rules on the assumption you will take it when you turn 65.
The downside of taking it early is that there is a penalty involved. The penalty used to be 0.5% each month (6% per year total) but has now increased to 0.6% per month (7.2% per year) – from 2012 to 2016.
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So this means under the new rules you’ll be penalized an extra 6% for taking Canada Pension Plan early.
What’s even worse is that the penalty is increasing each year. Here is a schedule of CPP penalty for early election:
|Penalty Per Month (%)||Annual Penalty (%)|
If you turn 60 in 2016 and plan on taking it then, you’ll receive only 64% of what you’d normally get if you waited until you turn 65 (a 36% penalty).
If you turn 60 in 2015 and take CPP then, you’d only receive 65.2% of what you’d normally get if you waited until you turn 65 (a 34.8% penalty).
By implementing these new changes, it’s pretty clear the government doesn’t want us to take Canada Pension Plan early.
Late Election Bonus
Prior to 2011, you’d get a bonus of 0.5% each month you waited to start taking Canada Pension Plan after turning 65 – up until you turn 70. (After you turn 70 there are no more incentives from the government to delay taking CPP).
The new rules have increased the monthly bonus to 0.70% per month in 2013 (or 8.4% per year).
This bonus can really add up – assuming you wait until you turn 70, you’d receive a bonus of 42% (0.70% x 60 months).
You Can Now Work While Receiving CPP
Before the new rules came into effect, you had to stop working by the end of the month before you started receiving CPP (or simply earn less than the maximum retirement pension within those two months).
Under the new rules, you can still receive Canada Pension Plan beginning at age 60 while still working full-time.
This is great for those who aren’t ready to quit at age 60 but still would like to take CPP early.
Receiving CPP While Working
If you continue working while receiving Canada Pension Plan and are under the age of 65 the new rules state you’ll still need to make the mandatory CPP contributions each month.
These funds will then go into the new Post Retirement Benefit.
The Post Retirement Benefit (PRB) is a new lifetime benefit that gets increased each year with the cost of living. You don’t have to apply and any contributions made will be paid back to you the following year.
Click here for more information about the Post Retirement Benefit.
If You Receive CPP While Working (Over Age 65)
If you are at least 65 but not yet 70 years old you’ll still need to contribute to CPP each month. Just as the contributions made before you turned 65 (explained above), they will go towards the new Post Retirement Benefit (PRB).
The big difference is that once you turn 65 you can elect not to contribute towards the Post Retirement Benefit (PRB).
An election needs to be made by employees – it’s called Form CPT30 and is available on the CRA website. Those who are self-employed can make the change on Schedule 8 of their personal tax return.
Increase in Drop-Out of Provision Years
The government uses average earnings when calculating how much of the Canada Pension Plan an individual will receive.
Under the old rules, the government would drop (not include) 15% of the years of lowest earnings when calculating your average earnings.
Under the new rules, in 2014 the government now will drop 17% of the years of lowest earnings for the average earnings calculation.
What this means: you can now have more time with lower earnings and it won’t drop the amount of CPP you will receive.
Conclusion: the new CPP rules offer incentives to delay taking CPP before age 65. For those looking to retire early, this could mean lower amounts received each month due to the increase in penalty.
On the other hand the increase in the drop-out of provision years means you can have more time of lower earnings – perfect for those who wish to go back to school full-time or take time off to raise children.
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