What Is a CPP?
The Canada Pension Plan (CPP) is the cornerstone of many retirement plans. It’s typically taken off of an employee’s paycheque at source, and contributed to by an employer and the employee. It is a life-long income that is paid monthly, subjected to tax at the individual’s marginal tax rate for the year, indexed for inflation, and is paid until the person dies, or in the event of married couples, paid until the death of the last surviving spouse.
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Will This Get Me Through Retirement?
Although Canadians shouldn’t expect this to be their only source of income once they stop working and enter retirement, a CPP can represent an important piece of anyone’s retirement puzzle. The strength (or limitation) of this benefit is that once it’s released, it will always be available, provided you or your spouse are still living. It doesn’t matter if you pass at 65 or 105. If however, you and your spouse die before you’ve begun to receive money from your CPP, the benefits which you’ve paid into will never pay out.
Does Anything Change If I Get a Divorce?
In the event of a divorce, if one spouse made significantly less than the other, the spouse who earned less is entitled to credit splitting, where the higher earning spouse is required to split the CPP contributed amount while the couple was married or common-law. This amount is not paid as a cash settlement, but instead becomes a separate account that remains inaccessible until one partner decides to start taking their CPP retirement income. This could be as early as age 60.
The only other way you can receive CPP compensation before the age of 60 is in the form of CPP Disability payments. This is difficult to qualify for as the recipient must be completely disabled and deemed unable to work by the CPP Disability office. The amount you may be eligible to receive will depend on how much you have contributed to your CPP in the past, how long you contributed for, and whether you have any dependent children relying on you for support.
Should I Take CPP Payments Early?
Let’s say you are 60, and your financial situation looks a lot different because you just went through a divorce. Should you dip into your CPP now? There are a number of things to consider when evaluating this question:
- Where does the CPP factor into your entire retirement income plan?
- What age are you planning to retire at?
- How long do you plan on living for? (I make the comment tongue in cheek, as this is one of the biggest variables affecting how long your retirement income will last you.)
These are the gross numbers:
If you take your CPP at the age of 60, the maximum benefit you can receive as of 2018 is $725.86/month. This is calculated by reducing the CPP benefit by .6%/month, until you reach your 65th birthday. In other words, your CPP benefit would be reduced by up to 36% if you started taking your CPP on your 60th birthday.
If you take your CPP on your 65th birthday, the 2018 maximum benefit is $1,134/month.
If you wait and take your CPP on your 70th birthday, the 2018 maximum benefit is $1,610/month, or an additional 0.7%/month for every month you waited beyond your 65th birthday.
If a CPP and Old Age Security (OAS) are the only definable parts of your retirement plan, you may be forced to take them earlier than later, depending on what your monthly living expenses are. If you have a private pension, TFSA,or registered or non-registered retirement funds, you may not opt to take your CPP until you’re 65 or 70. Remember that you are trying to optimize tax efficiency as well. You may want to access your TFSA if you have one (because it is not subject to taxation), and non-registered funds first (because tax has already been paid on it except for the gains within the last taxation year), then access any registered pension or RRSPs later. The absolute latest you can take your CPP and OAS pension is age 70.
In summary, the only way you can access your CPP while going through a divorce is if you are 60 or older, or if you qualify for CPP Disability payments.
If you have any questions as to what is the best solution for your situation, it’s advisable to talk to a trusted financial advisor.