A few weeks ago we wrote about the Canada Pension Plan and the shocking fact that some 26,000 seniors over age 70 are not receiving the benefits to which they are entitled.
We also touched briefly on the eligibility for early application for CPP. It turns out that the rules have apparently "evolved" somewhat beyond the rules shown on the Service Canada website. Some alert readers made me aware of this and confirmed it with the local CPP office.
The "normal" retirement age for Canada Pension Plan (CPP) benefits is age 65. If you have reached that milestone, then you can apply and begin receiving your benefits, even if you are still working full time.
You can also apply any time after your 60th birthday, but you must meet an income test.
The rules now state that you only need two months of income below the age 65 CPP maximum (currently $885 per month) in order to qualify for early CPP benefits. After that, you can resume any amount of employment, self-employment, professional practice, or become a best-selling author or rock star.
Those two months must be the month before the CPP pension begins and the month in which it actually begins. Income means net self-employment income or gross employment income.
There is a second option: zero income in the month that the CPP pension starts will also qualify you.
In both cases, this is a self-assessment on the honour system. They accept what you tell them as proof.
There are a few considerations regarding early benefits to keep in mind.
Your benefits are reduced by 0.5 per cent per month for each month that you are younger than age 65. So, if you start CPP on your 60th birthday, you receive 30 per cent less than you would have received starting at age 65, assuming you were going to keep contributing at the maximum level. Starting at 60 means five extra years of benefits and five fewer years of contribution premiums.
For example, CPP at age 60 for a person at maximum benefits is about $620 a month, theoretically growing to $885 a month at age 65. Under this scenario, you would have received over $37,000 (before taxes) prior to your 65th birthday.
If you wait, you will perhaps have an extra $265 per month for life, but only if you would have still qualified for the same percentage of the maximum pension when you reach 65. If you are no longer contributing at the same level as before, then your percentage of the maximum will quite possibly go down between age 60 and 65.
If you start early, make sure you will have other sources of retirement income later, to maintain the real purchasing power of your total retirement income.
Other considerations include having sufficient years of contributions to qualify your estate for death and survivor benefits, and the ability to then switch to a disability pension, in the event you become disabled.
Receiving cash from the government sooner is obviously attractive, but the real advantage I see is the exemption from having to make the contributions anymore. For some people, that is the big win.
The 2008 contribution level is 4.95 per cent of earnings (9.9 per cent for self-employed people) to a maximum $2,049 per year, or twice that if you are self-employed. Even though you get a tax credit of 26 per cent of this, it's still a lot of money.
So, how do you qualify for early CPP? Basically, you need to take two months off of work. If you are self-employed, own a corporation, or are a partner in a professional practice, then stop your salary or any other payments for two months.
Service Canada is the department to visit: www.servicecanada.gc.ca/en/home.shtml and click on the Seniors and CPP links.
If you are in a position to take early CPP, it might be worth considering.
David Christianson is a fee-only financial planner and investment counsel with Wellington West Total Wealth Management Inc. His column appears Fridays. You can e-mail him at dchristianson@wellwest.ca.
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