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November-25-11

So is that new CPP Early Retirement Benefit worth it?

Last January, I wrote about some of the changes to the CPP and their impact on timing the start of your CPP benefits. So when should I start receiving my CPP benefits?  I recently looked more closely at one of the new provisions – the Post-Retirement Benefit (PRB).  In my January article, here’s what I had to say about this feature:

A new Post-Retirement Benefit is being introduced, starting in 2012. Under current rules, once CPP payments start, they will not change if the pensioner returns to work – new earnings would be exempt from CPP contributions.
Beginning in 2012, those pensioners who are under age 65 and who return to the workforce will be required to contribute to this new benefit, as will their employer. If return to work is between 65 and 70, additional contributions will be voluntary. Other factors:

  • Self-employed beneficiaries will pay both employer and employee contributions
  • Contributions will entitle the beneficiary only to Post Retirement Benefit payments. No eligibility or increase in other CPP benefits will be created, nor will these contributions be subject to credit splitting or pension sharing.
  • Each year of work will provide an additional post-retirement benefit that will begin the following year and will be paid for life.
  • The Post Retirement Benefit will be added to an individual’s CPP retirement pension, even if the maximum pension is already being received.

This provision will become another factor to be considered when looking at starting CPP early. If CPP starts at age 60 and the pensioner subsequently returns to work (or continues to work, since no cessation test will apply), it may be preferable to receive an increased pension at 65 than to supplement the reduced pension with the Post-Retirement Benefit.

Service Canada’s website (slides 51 and 52) provides the following example and calculations to demonstrate this benefit.

  • Mr. Lee began his CPP at age 60 in 2007.  In 2012, he will have $50,000 of earnings.  (The example is based on an assumed Year’s Maximum Pensionable Earnings of $49,600, which would require maximum employee contributions – at 4.95% - of $2,281.95, or $4,563.90 if self-employed.)
  • In 2013, Mr. Lee will be entitled to an additional $28.02 per month of CPP benefits.  Mr. Lee will be 66 on January 1, 2013, so the calculation adjusts for the pension starting after age 65.
  • Mr. Lee will be entitled to a further increase in his CPP benefits each year that he continues to work and contribute to CPP, until age 70.

So, does it make sense to continue to contribute between 65 and 70? To get a general idea, I ran an annuity quote using Manulife’s software.  The minimum income number on their quote system is $100 and it would cost $20,801.75 to purchase a life annuity, for a 66 year old male, which would pay $100 per month for the rest of his life, increasing at 1.5% annually (CPP is indexed to inflation, so a 1.5% increase was included in the annuity quote to simulate inflation).  Bear in mind that one of the factors in an annuity is the interest rate that is used in the calculations.  The quote was prepared on November 25, 2011, so is based on rates in effect then.  Given that quote, if we take 28% (since Mr. Lee’s benefit is about $28 per month and the quote was for $100 per month), it would cost $5,825.  Compare this to the total premiums paid for the CPP benefit of $4,563.90 and the CPP benefit may not be such a bad deal after all.

This material is meant to provide some guidance.  As with so many things, these are general comments and may not apply in all cases.  Everyone is unique and decisions must be made with their personal circumstances in mind. 

By: Kathleen Clough | 3 comments