CPP Background
CPP/QPP (called ‘CPP’ for the purpose of this article) is a partially funded government pension that pays a pension income for life for those who contributed during their working years.
In 2024, the maximum pension amount at age 65 is $1,364.60 ($16,375 per year), however the average payment is $816.52 per month. Your earnings and contributions during your career will determine your pension entitlement. You can obtain an estimate of your CPP payment by signing in to your My Service Canada Account.
Additional details on the CPP and how it is calculated can be found here.
All (CPP-participating) Canadians have a choice as to when to start collecting CPP. You can begin your pension anytime between age 60 and age 70. What makes the most sense depends on your financial (and other) circumstances and should be discussed with your financial planner.
What is the difference if I take my pension earlier or later?
If you take CPP at age 60, the pension amount is reduced by 36% (or 7.2% per year) such that only 64% is paid. This is called the actuarial equivalent and represents the fact that the pension has to cover five more years than if you retired at age 65. Similarly if you take CPP at age 70, the pension is increased by 42% (or 8.4% per year) to represent the fact that it is payable for five fewer years than had you taken it at age 65.
For example, if the CPP formula calculates your pension entitlement at age 65 as $15,000 per year, the table below outlines your pension amount if you choose to collect earlier at age 60 or later at age 70. These figures will adjust only for inflation each year.
Things to consider when deciding what age to collect CPP
Pensions are indexed to inflation and guaranteed for your lifetime. There are some survivor benefits but we will not focus on these here. All CPP income is taxable. In your early years of retirement, people often withdraw larger sums from RRSPs or RRIFs to pay for travel or larger expenses (new car etc.). All income from RRSPs, RRIFs, LIFs are taxable. As such, taking CPP at the same time could bump you up into a higher tax bracket and result in a higher tax bill
To the extent you can defer taking CPP, it may make sense to wait until later. This way the guaranteed indexed income is increased and continues to be provided in years when RRSP/RRIFs may be exhausted, you are in a lower tax bracket and that guaranteed income becomes invaluable.
There are many things to consider when taking CPP. You may still be working and have some debts and perhaps a mortgage at age 60, so you may take it early to pay off these debts before you retire officially.
Alternatively, you may be debt free with larger RRSP/RRIF assets to support you in the short term. Health care should also be considered. Guaranteed income from CPP can help cover long-term care in your later years, should this become necessary.
Predicting our longevity can also help with the decision making process. Without a crystal ball, we can look to our family history for general indicators of life expectancy. Most breakeven calculators (utilizing many assumptions) suggest that at age 60, if you live past age 75, you are better off waiting until age 65 to collect CPP. Furthermore, if you are age 65 and wondering if you should wait until age 70, the math suggests this decision will pay off if you live past age 82.
We always recommend speaking to a financial planner before making any decision. Every situation is unique and it pays to speak to an unbiased expert!