A Look at What Age Can You Collect CPP and How it Affects Your Retirement Benefits
The Canadian Pension Plan (CPP) is a staple for Canadians in retirement. And many Canadians wonder if they can apply for CPP for early retirement.
When it comes to early retirement at age 55, CPP is not an option. But it is at age 60.
However, taking out your Canada pension for early retirement can have its drawbacks. So if you want to retire early, you’ll have to consider whether it’s worth applying for your CPP early on as well.
What Is It
The CPP benefits provide supplemental earnings to contributors and their families in the event of retirement, disability, or death. Almost all Canadians outside of Quebec contribute to the CPP.
In the event of retirement, the CPP retirement benefit provides a monthly benefit payment to eligible applicants.
The CPP is also divided into the following categories:
- Retirement pension. You can apply for the retirement pension at age 65, as early as age 60 or as late as age 70.
- Post-retirement benefit. If you are under 70 and working while receiving your CPP benefit, you can also contribute to your CPP pension. These contributions will go toward post-retirement benefits and increase your retirement income.
- Disability benefits. You can qualify for these benefits if you are under 65 and can no longer work at any job on a regular basis.
- Survivor’s pension. Your pension may be paid to your spouse or common-law partner when you die.
- Death benefit. A one-time payment to the estate of CPP contributors when they die.
- Children’s benefit. Monthly payments to dependent children of CPP contributors who made enough CPP contributions and who die or become severely disabled.
What Qualifies as a Full CPP Pension?
To get a full CPP pension, or the maximum benefit amount, you must contribute to the CPP for at least 85 percent of the time you are eligible to contribute. Since Canadians are eligible to contribute from age 18 to 65—or 47 years—85 percent of that time is 40 years. So to qualify for a full pension, you must contribute to the CPP for at least 40 years.
You also must contribute enough for each of those years, based on the Yearly Maximum Pensionable Earnings (YMPE). If you earned less than the YMPE, then you didn’t contribute enough to the CPP for that year.
How Does It Work
You must apply for CPP benefits since they don’t start automatically. You can apply online or by mail.
CPP pensions are calculated based on the number of years you contributed to the CPP and the amount you contributed each year between the ages of 18 and 65. So if you contributed the maximum amount each year for 40 years, then you will receive the maximum benefit amount. But if you only did so for 20 years, then you will receive about half of the maximum amount.
A certain number of months with the lowest earnings can be dropped from the calculation so these low earnings won’t negatively affect your pension. And if you had a low income or no income because you were the primary caregiver raising your children, you can request the child-rearing provision which can increase your benefit amount.
When the cost of living goes up, so does the amount of CPP benefits. The monthly benefits are adjusted in January of each year and are based on the Consumer Price Index.
How Should I Prepare Myself?
The CPP should only be a part of your retirement plan, complementing other retirement funds, such as pensions, RRSPs, Old Age Security, TFSAs, stocks, and other investments.
So to prepare yourself for retirement, create a budget which should include retirement income, living expenses, debts, and extras for entertainment, travel, and leisure. And set realistic financial expectations for your retirement.
To help you budget, you can find out how much you can expect to receive from the CPP by requesting a Statement of Contributions from Service Canada.
When Should I Take It Out?
Although the standard age to start collecting CPP is 65, you can take it out as early as age 60 or as late as age 70. But when you take it out will affect the total benefit amount you receive.
Waiting Longer Means You Get More
If you delay collecting your CPP benefit, you will receive a more significant benefit overall. You will receive 100 percent of your benefit if you start collecting CPP at the standard time—a month after you turn 65. And if you wait until age 70 to collect CPP, your benefit will increase by 42 percent, or 0.7 percent per month after you turn 65. Note that there is no financial benefit to delaying your CPP benefit after the age of 70.
But if you choose to start collecting CPP earlier than 65, your monthly benefit will be reduced by 0.6 percent for each month before you turn 65. So if you start collecting CPP at age 60, your benefit will be reduced by 36 percent.
If Your Health Is Deteriorating, It Might Make Sense to Take It out Early
If you’re concerned about your health now and in the future, consider taking out your CPP early to make the most of the benefits. And if you’re incapable of working due to a disability, then apply for a CPP disability pension instead of an early retirement pension. The amount of the disability CPP pension will be higher than the early CPP, and it will convert to a full pension at age 65.
If You’re Not Working
If you are no longer working, you will no longer be contributing to your CPP. And each year of zero contributions can result in a decreased retirement pension if you delay receiving CPP.
If you’re not earning a steady income from employment and you don’t have any other or enough sources of funds, then you should consider collecting CPP earlier. Many retirees also choose to collect CPP earlier if they have high-interest debts to pay off.
Taking CPP at 60
If you want to retire early, be sure to weigh the pros and cons of applying for CPP benefits early:
You will have more income early on to enjoy your retirement. And you can use this extra income for investments.
You will not receive 100 percent of the benefit amount—it will be lower than if you waited until 65.
Also, earning a higher income when collecting CPP benefits could put you in a higher tax bracket that will negatively affect your Old Age Security benefits, known as the OAS clawback income bracket. If your taxable income is higher than $75,000 and lower than $120,000, every extra dollar of income will lead to a 15 cent deduction from your OAS.
When it comes to retirement, everyone is different. Different needs, incomes, and lifestyles will affect how early Canadians retire and when they decide to apply for CPP. So how you decide to use your retirement funds is up to you. It’s your retirement, so make sure it’s as comfortable and enjoyable as possible.