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The Companion Advisor: Retirement Planning
Get your CPP early

By Jim Yih, B.Comm, PRP, CSA, EPC, RDB
Companion advisor special - 7/07

To qualify for CPP, you basically have to meet two key criteria. The first is you must be over the age of 60. The second is you must have made at least one valid contribution (payment) into Canada Pension Plan. How much income you get depends on how much you put in and for how long you contributed into CPP. Remember that CPP is a contributory plan which means that all benefits are funded by financial contributions made by employees and employers. CPP is not funded by general tax revenues. In other words, how much you get is dependent on how much you put in.

At the age of 65, you qualify for the normal retirement amount but it is important to note that the benefit does not start automatically. You must apply for it. Service Canada recommends that you apply for your pension six months before you want your CPP to begin. If you want to collect CPP before the age of 65, you must also apply but there is another requirement to meet. To get CPP between the age of 60 and 64, you must have either stopped working or you earned less than the current monthly maximum CPP benefit ($864) in the month your pension begins and the month prior.

Let's pretend you turned 60 in February this year. Your first CPP cheque will come in March, the month after you turn 60. In order to qualify, you cannot earn more than $864 in March and February. After March, you can go back to work and make as much money as you want. The added bonus about earning an income after you collect CPP is that you no longer have to pay into CPP. Once you start collecting CPP, you cannot pay into it.

Let's take a look at an example of how this might work in a real life application.

Jack owns a small business. At the age of 60, Jack decides he is going to take 2 months off so he can collect CPP early. Jack also recognizes that if he starts taking CPP at age 60, he will also no longer has to pay into CPP. This is really advantageous for self employed individuals because they have to contribute both the employer and employee portion. This is a significant savings to Jack.

Jack is married to Jill who is a teacher. As a teacher, Jill always gets the summer off and does not get paid in the two months July and August. Theoretically, once Jill turns 60, she could qualify to apply to collect CPP in August because she will have no income in the month the pension begins (August) and the month prior (July). Once Jill goes back to work in September, she will no longer have to contribute into CPP giving her less deductions off her paycheque and more net income.

Although both Jack and Jill qualify to collect CPP according to the rules, recognize that CPP was not really designed to work this way. Also recognize the example is a little simplistic in that it does not take into account tax rates.

In most cases, I think taking CPP as early as possible is the right thing to do. Delaying your CPP benefit means that you must live an extra year to make up the lost income in the year you did not take CPP. For those that plan to work after retirement, the added benefit is not having to contribute into CPP again. Although the notion of taking CPP early is pretty compelling, it is not for everyone. Take the time to do the calculations for your own personal circumstances.

Jim Yih is the author of the Best Selling Mutual Fundamentals and also Seven Strategies to Guarantee Your Investments. He is a Financial Expert and writes a regular weekly syndicated column and is a professional speaker and lecturer on wealth, retirement and personal finance. For more information you can visit his personal website www.jimyih.com or email inquiries to feedback@WealthWebGurus.com.

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