Pop quiz -- are you aware of the recent changes to Canada's government retirement systems, and how those changes might affect you?
In January 2012, a new set of rules became effective for the Canada Pension Plan (CPP) and these can change your best strategy for the timing of your application for benefits.
Starting July 1, 2013, Canadians turning 65 will have the option of delaying their old age security (OAS) benefits and receiving a higher monthly benefit at a later age.
This can be advantageous for someone still working and in a high tax bracket, or above the OAS clawback threshold, which starts at $70,494 of net income. Some benefits are still received until net income reaches $104,640, at which time it has all been clawed back.
Each month of delay will increase the benefit by 0.6 per cent, or 7.2 per cent for each full year of delay. The maximum benefit in 2013 for a 65-year old is currently $546, going up each quarter by inflation. Deferring benefits two years would increase this by 15.4 per cent, to $630 for a 67-year old.
A bigger modification to the system will begin in 2023. Between then and 2029, the earliest age to begin OAS benefits will be gradually increased to age 67. This will affect anyone born on April 1,1958 or later. Older folks need not be concerned.
CPP changes: Recall that "normal" CPP retirement age is 65, but you can choose to take smaller benefits as early as 60, or opt to take higher benefits later.
A positive change in 2012 was more flexibility on taking benefits early. Previously, an employee had to stop work for at least two months, or certify they had substantially "ceased employment." Now, an employee can start CPP benefits any time after age 60, even while working.
However, if you continue working, you and your employer must both continue paying into the plan, even while you are receiving benefits. That change is huge, as avoiding premiums had been one of the advantages of taking benefits early. Now, there is much less incentive for people who are still employed or self-employed to take early benefits.
Premiums aside, there is a reduction to your benefits if you take them early and an increase to benefits if you take them later. In this area, there are more changes. The decrease was previously 0.5 per cent for every month you started benefits prior to age 65, for a reduction of six per cent for each early year. The reduction, therefore, for a person exactly age 60 was 30 per cent -- five years times six per cent per year. Delaying application past 65 increased benefits by the same rate.
For 2013, the adjustment rate will now be 0.54 per cent, or 6.48 per cent annually. It will move up in small steps until 2016 to become 0.6 per cent (7.2 per cent per year), for a 36 per cent maximum reduction for a person starting benefits at age 60.
Good news is that the reward for waiting is more generous than in the past. Waiting from 65 to 66 will increase benefits by 8.4 per cent, and a person waiting to age 70 can have their benefits increased by 42 per cent, once these changes are fully implemented in 2016.
There is also a new concept called the Post-Retirement Benefit (PRB). People who are receiving benefits but are working will now pay into the CPP in order to increase their future benefits. At 65, you can choose to opt out of this PRB.
Contributions to CPP made while you are under age 65 and working while receiving CPP benefits, or voluntary contributions made after 65 while still working and receiving CPP benefits, all go toward the PRB, increasing future benefits.
A person who is employed or self-employed at 65 can opt out of paying premiums (by filing form CPT30), but only if receiving CPP (or QPP) benefits at that time.
If you are of a certain age, you will want to be up-to-date on these changes and how the system can work best for you. Hope this helps!
Dollars and Sense is meant as an introduction to this topic and should not in any way be construed as a replacement for personalized professional advice.
David Christianson is a financial planner in Winnipeg, and author of Managing the Bull -- A No Nonsense Guide to Personal Finance.