Illustration by The Globe and Mail
Q: I have read about the government’s postretirement option for CPP. Is it true that it allows contributors to collect a reduced CPP payment at 60 and still contribute to the plan while working? And once I reach 65, the pension amount is very close to what would have been paid without taking the benefit at 60? What do I do with those funds – put it in a TFSA or RRSP? Looking for clarity.
We asked Dave Middleton, adviser at Sun Life and CEO of Middleton Finner Financial Services Inc., to answer this one.
There are a number of considerations to take before opting into the Canada Pension Plan before 65. Mr. Middleton advised that you first consult a financial adviser and accountant to ensure that the increase in your retirement income will not negatively affect your eligibility or benefit amounts from the Old Age Security Pension (OAS), the Guaranteed Income Supplement (GIS) or other provincial or territorial programs.
“Most insurance and investment companies also have an estate and financial planning department that may be a great resource for making an informed decision that may very well affect the rest of your life,” he added.
He broke down the numbers: Collecting CPP before age 65 results in a reduction of 0.6 per cent per month or 7.2 per cent a year. “If you take CPP at 60 you receive a reduction of 36 per cent compared to what you would have received at age 65.”
I don’t have a company pension. How can I create a ‘paycheque-style portfolio’ when I retire?
It’s important to note that CPP contributions are mandatory for working CPP retirement pension recipients between age 60 and 65. “These contributions create additional income through the CPP Post-Retirement Benefit (PRB),” Mr. Middleton said.
The CPP PRB is a lifetime, inflation-indexed benefit for those between the ages of 60 and 70 who are receiving CPP but still working and contributing to the plan. It is automatic, doesn’t require an application, and increases your income annually. The benefit is automatically paid the year after you make contributions. Between the ages of 65 and 70, contributions become voluntary. PRB payments are taxable income when you receive them.
The maximum PRB for a single year is equal to one-40th of the maximum CPP retirement pension. He pointed out that not everyone, however, will receive the maximum, as it is based on your earnings and contributions each year. This makes your individual PRB dependent on your yearly income while still working, so it would be prudent to do the math.
I’m thinking of retiring and moving to the East Coast. What are the pros and cons?
“It may or may not fully replace the reduction for taking CPP at age 60.”
Where to invest the additional funds if you do not need them for living expenses is another conversation to have with a financial adviser and accountant. “While contributing to your RRSP will potentially provide you with a tax deduction helping defer immediate tax, you will need to pay tax on withdrawals from the account later in life as they are considered income,” he said. This additional income could again affect the amount of OAS or GIS that you receive.
Contributing and maximizing the shelter offered by a tax-free savings account doesn’t provide you with upfront tax savings, but provides you with the savings of no tax on growth, and no tax on withdrawals, Mr. Middleton said. Therefore, it does not affect your taxable income during retirement and does not negatively affect OAS or GIS.
Do you want advice on a financial planning or retirement issue that’s affecting you? Send us an e-mail.
