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If you’re a working Canadian 60 + you can apply for pension payments from the Canada Pension Plan (CPP). YES, you can receive CPP payments if you’re still working. Canada is one of the few countries where you can do this. And, Garth Turner in Geezernomics highly recommends it. He says, “Any time the government gives you money, take it.”

There are, however, a number of requirements:
1) You need a Social Insurance Number (SIN)
2) You need to be age 60 or more
3) You need to have made CPP contributions.

You will NOT receive the maximum amount if you apply for CPP payments before age 65. Pension payments will be about a third less at age 60 than at 65. And you will receive slightly more if you wait until age 67 according to recently revised rules. However, there are a number of reasons for applying before you are 65 or 67.

Reasons for applying early

1) If you apply at age 60, you will have 60 months of (slightly less) monthly payments than if you had waited until 65. At $500 a month that works out to $30,000 in your pocket and at $800 a month it works out to $48,000.

2) The next recession will be deeper, longer and more painful than the last one as I’ve mentioned in previous commentary so tax revenue will be drastically reduced and a desperate government can easily change the rules. They may prohibit applying for CPP payments if you’re still working.

3) Drastically reduced tax revenue may prompt a desperate government to increase pensionable age. They already did this in 2011 to encourage people to wait longer before applying for pension payments so they might do it again

4) Changes to CPP pensions will affect those who have NOT yet applied. It won’t be impossible but it will be much more difficult for the government to enact restrictions for those people already collecting pensions. Boomers are a large part of the country’s demographic; they VOTE and the government knows this.

Reasons to WAIT before applying

There are reasons you may want to wait to either 65 or 67 before applying for CPP payments.

1) CPP payments are based on the number of years and the amount you contributed to the plan. The magic number is 40. If you contributed the maximum amount per year for 40 years you will get the maximum pension payment (less a percentage for applying early). So, if you are a long way from the magic 40, you might want to wait and contribute more into the CPP before applying for pension payments. Every person is different so you’ll need to make your own determination (more on this later).

2) If you think you’ll live for a very long time, you may want to wait before applying for payments. Because applying early reduces monthly payments, at some age you’ll reach a point where total accumulated pension payments become less than if you had waited. Again, every person is different and you’ll need to make your own determination.

In my case, if I apply and start receiving CPP payments in January 2013 at age 62 I am ahead until age 77. If I live longer than 77, then my total pension payments will be less than if I had waited until 65. Since most of my male ancestors kicked the bucket in their early to mid 70s and since my generation is likely to live a few years longer, anything beyond 77 will be a bonus (actually I plan to live forever. So far, so good!) Also, when estimating your lifespan, keep in mind that females typically live longer than men.

I plan to divide my pension payments between a Tax Free Savings Account (TSFA) and a Registered Retirement Savings Plan (RRSP). Although the TSFA is not tax deductible when contributing to it, the RRSP is tax deductible and will eliminate the extra tax I would have had to pay for the extra income from CPP payments. Yes, CPP payments ARE taxable as income but RRSP payments can reduce or eliminate this extra income tax depending on how much room you have left for maximum RRSP contributions.

Also, my age calculation of 77 does not take into consideration the magic of compound interest. Einstein is rumored to have said that “the most powerful force in the universe is compound interest”. I intend to make very conservative investments like Guaranteed Investment Certificates (GICs) so they’re unlikely to lose money and even with low interest rates, the magic of compound interest ensures my savings will grow (albeit less than inflation). The point is you must be careful where you invest and avoid risky speculation.

Another possibility you might consider instead of, or in addition to TSFA contributions is using some of your CPP payments to reduce your debts such as mortgages, loans or outstanding credit card balances and make sure you pay down the highest interest debt first (probably credit cards). Considering that savings interest rates are so low (roughly 2% or less) if you’re paying 19% interest on credit cards, you may be better off paying off high interest debts because that puts you 19% – 2% = 17% ahead. That’s like earning 17% a year. In other words you’d be wise paying down high interest debt instead of earning low interest savings.

Garth Turner also says,
• “But what about the 30% more if you wait five years? If you absolutely know you’ll live to 95, wait. And don’t play in the traffic. But for most of us it makes way more sense to collect the largesse as soon as possible, and invest it. Sixty monthly payments of $500, for example, equal $30,000. That amount invested for a 7% return becomes $60,000 in ten years, tax-free if inside your TFSA. That sure beats waiting to get an extra $150 a month.

• “Finally, you’ve contributed to this sucker your entire working life, so why not start sucking cash out the moment you have a chance? That way you’ll drain far more from the plan than you ever contributed, which is excellent revenge for being, like, old.”

I have some minor quibbles with Garth:
1) If you can find a SAFE investment vehicle nowadays that pays 7% a year, please tell me about it. But, even if you earn 2% you take advantage of compound interest.

2) He loves TSFA’s and hates RRSPs. However, TSFAs are limited to $5,000 annual contributions. Although they are tax free when you withdraw, they are NOT tax deductible when you contribute to them and you’re contributing now when you’re in a higher tax bracket than when you retire.

3) He hates RRSPs because they are taxable when you withdraw. However, you’re withdrawing when you’re retired and probably earning less and therefore at a lower tax rate. AND, they are tax deductible NOW when you’re at a higher tax bracket

4) Therefore, a good investment strategy is to collect CPP pension payments now when you’re working and use both TSFAs and RRSPs so that the RRSPs, since they’re tax deductible, offsets the extra income tax you’d normally pay as a result of pension income.

Everyone is different so you need to include your circumstances in making these calculations and decisions. Also, waiting until 67 may make even less sense because with the combined pension earning from the two years (65 to 67) you’d need to live forever to make it worthwhile waiting until 67. Again, everyone is different and so you need to crunch the numbers.

You can get a CPP Statement of Contribution on-line that shows you your contributions. As well, you can print an application form that you need to complete, sign and mail in. To do so, you must have or apply for a Personal Access Code (PAC) which will be mailed to your address. You can apply for a PAC on-line or in person at a Service Canada centre. Hey, I never said it would be easy.

Service Canada web site is WWW.servicecanada.gc.ca and their phone number is 1-800-622-6232. The web site specifically for Canada Pension Plan is http://www.servicecanada.gc.ca/eng/sc/cpp/retirement/canadapension.shtml and their phone number is 1-800-277-9914. Neither the web sites nor the endless menus on the toll-free phone numbers are easy and require patience. Also, be sure to scroll to the bottom of pages so you don’t miss a ‘Continue’ link. I did and went in circles for hours.

So I gave up and visited the local Service Canada centre. Good luck finding their address in the phone book. They tried to steer me back on-line but I insisted on talking to a real human being. I never said it would be easy.

By the way, the Service Canada lady I talked with not only entered my request for a PAC she also made a phone call to find out what my pension payments would be a different ages (I don’t know if all of them can do that). In a hushed voice, she said that most of her colleagues apply early for CPP payments when they reach 60 or shortly after. Obviously, they know something.

Note: if you continue working and collect CPP pension, you and your employer still need to continue making CPP contributions. There’s lots more details on line and I encourage you to read as much as you can.

Note too: on-line CPP information is geared to making you wait as long as possible before you apply for pension payments. This is not surprising. If you wait until just before you croak then you’ll have made a lifetime of contributions and withdrawn next to nothing leaving more for the rest of us. Thank you 

Also, there’s an on-line CPP Retirement Income Calculator where apparently you can run different scenarios to calculate pension payment at different ages. You need a Personal Access Code (PAC) to use it. As I’m waiting for my PAC to arrive in the mail, I haven’t tried it yet so I can’t comment on it.

Also, also, if you have a company pension plan you might want to check with you pension plan administrator to ensure CPP pension payments don’t adversely affect the plan.

Good luck!

Usual Disclaimer: I’m not an investment advisor so financial articles are for commentary only. For specific financial advice you should consult your own investment professional.

Gerold
November 30, 2012

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