The Quebec Pension Plan (or QPP) is changing in the coming years. In line with the Canada Pension Plan, the QPP is increasing the amount that employees and employers will have to contribute over the next 7 years. The public pension will eventually replace 33% of earned income in retirement, up to a salary level of about sixty-five thousand dollars. That compares to about 25% of a maximum of about $56,000 last year.
Now, before you get all excited about it, these changes will only affect your QPP benefit to the extent that you actually paid into the new enhanced plan. Only those who are starting their careers now will get the full benefit of the plan in about 40 years, since they will have contributed at the higher rates since the beginning.
But what if you’re close to retirement now? Or maybe you’re already retired but haven’t started drawing your QPP and Federal Old Age Security (or OAS)? When should you apply for these?Today, I’m going to try to shed some light on the factors that you need to consider before answering these questions.
First, the facts of each plan:
Many assume that you have to start taking your QPP at age 65. You can actually start drawing your QPP as early as age 60, or as late as age 70. The Quebec government penalizes you for taking QPP early, to the tune of 0.6% for every month you take it ahead of your 65th birthday. So, if you take QPP at age 60, you’ll get 36% less than what you would otherwise have received if you waited until age 65. If you wait until after age 65, you’ll get an extra 0.7% per month. That’s a 42% bonus on top of your base QPP amount if you wait until age 70.
OAS has a similar provision to encourage people to defer taking it until age 70. Unlike QPP though, you can’t take OAS before age 65. The bonus for waiting also isn’t as good, at only 0.6% per month, or a 36% bonus if you wait until age 70 to take it.
I won’t go into an exhaustive discussion of how you accumulate benefits under the QPP, because if you are reading this blog, chances are you’re near retirement and you don’t have many years ahead to try and max out your benefit anyway. And frankly, no one should make the decision to keep working or not solely based on what it will do to your QPP benefit. Your only choice then, is when to take your QPP.
There are three key factors in your decision
- How long do you expect to live? It’s not a fun question to ask, but if you have any health issues, or your ancestors have not endowed you with the gift of longevity, then you might want to consider taking your QPP and OAS earlier. The break-even age if you delay taking your QPP and OAS until age 70 floats between 82 and 86 years old. If you don’t expect to live that long, then take the cash sooner.
- How aggressively do you invest? The break-even math that I just mentioned really hinges on one key factor, the Real Return on your investments. The absolute return on your investments minus the rate of inflation each year is known as your Real Return. As your Real Return goes up, the age at which you break even also goes up. In other words, the more aggressive an investor you are, the more you prefer cash now to cash down the road. If you’re buying GICs and basically earning inflation, your break-even age will be around 82 years old. On the other hand, if you’re 100% invested in stocks and expect to beat inflation by 5%, then your QPP break-even for waiting will be somewhere out at age 90.
- Are you still working? If yes, then you may want to wait before taking these pensions. If you’re still earning enough to support your lifestyle, then the tax rates on these incomes will be high, and you’ll get more benefit from waiting to receive a higher amount, which will likely be taxed at a lower rate when you do eventually stop working. Plus, if you decide to keep contributing to your QPP after age 65, which is optional, it will get even richer.
A lot of finance writers also say that you should take OAS as early as possible, because of the possibility that it will be clawed back when you have to convert your RRSP to a RRIF. The years between 65 and 71 can be low earning years for many. The break-even math on OAS pushes a little further out than it does for QPP, since the bonus is not as big. Unless you’re making over $123,000 between 65 and 71, it likely makes sense to start taking OAS at 65.
I hope these guidelines have helped you think about when will be best for you to start taking these pensions. As with any situation, a personalized retirement projection is the best way to know what makes the most sense for your unique circumstances.
What do you think of the QPP changes? Let me know in the comments below.