The Quebec Pension Plan, just like the Canadian Pension Plan, represents a significant source of retirement income for Canadians. Payments from these plans are indexed to inflation and sustainably financed to see you through your retirement.
In the past I’ve discussed how to decide when to start drawing from QPP and OAS and some possible benefits from delaying drawing your government pension until a bit later in life.
If you are in your early sixties and facing the decision of when to start taking your QPP, three important changes came into effect on January1 that could help you make up your mind.
- Optional contributions past age 65 (if receiving QPP)
Up until now, contributions to QPP were mandatory as long as you were working, even if you were already claiming QPP benefits. You simultaneously contributed to, and drew from, your government pension for as long as you kept working. Earning income in your 90s meant contributing in your 90s!
As of this year, QPP recipients over the age of 65 who are earning employment income can opt out of making contributions to the plan. However, continuing to contribute will increase your pension benefits thanks to the retirement pension supplement. Contributions must cease at age of 72 (70 for CPP) regardless of your employment status.
- Protected pension amount after age 65
Another important change to the plan involves how your benefit amount is calculated.
Previously, if you had not yet claimed your QPP and were over 65, the calculation of your benefits included all months up to the date you applied for your pension. If your income dropped relative to your highest earning years, the inclusion of those months in the calculation reduced your average earnings throughout your career, lowering your benefit when you eventually started taking your pension.
Under the new legislation, your average earnings at age 65 are compared to your average earnings when you elect to receive your pension, paying whichever one results in a higher benefit. Thus, your pension benefit can increase if you continue working after age 65 but will not be reduced if your income falls.
For someone who chooses to delay taking their QPP and is not working, it means dropping up to five years of $0 income from the benefit calculation – no small matter!
- Deferring pension to age 72
The most straightforward change to the QPP is the option to delay receiving your pension until the month you turn 72. Previously, you were entitled to a 0.7% increase per month for each month you deferred receiving QPP, up to a maximum increase of 42% at age 70. The new deferral adds 24 more months to the calculation, raising the maximum increase to 58.8% at age 72.
Practically speaking, if you were eligible to receive the maximum QPP amount in 2024, deferring from 65 to 72 would increase your monthly benefit from $1,364 to $2,166, almost $800 more monthly. Keep in mind this is fully taxable income.
What will keep you up at night?
When to start taking your government pensions can be a complicated decision even when there are no changes to decipher. The recent changes help protect your pension amount, but don’t make the timing decision for you.
Deferring QPP to (at the latest) 72 means drawing more from your investments in the early years of your retirement. One typically only comes out ahead in their mid-80s compared to taking QPP at 65. If you expect to live into your 90s or are troubled by the possibility, delaying QPP is a way to hedge against that longevity.
Ultimately, the question to ask yourself is this: are you more comfortable with a slightly larger buffer against a long life if it comes at the cost of a little less money in the bank early in retirement?