Retirement Ready: Pension pressure

Changes to the Canada Pension Plan are coming and may affect your retirement decisions

David Lee is a financial adviser at BlueShore Financial

An important factor to consider in retirement planning is to be informed about Canada Pension Plan (CPP) rules and any amendments to them. There have been a number of changes to CPP over the last few years, as fewer Canadians today have defined- benefit pension plans through their employer than in the past. The most recent changes will take effect in 2019 and are designed to better facilitate retirement for individuals.

Currently, CPP pays a pension based on contributions made on income earned up to but not exceeding $54,900. This means that beyond this level, higher-income earners do not receive a CPP benefit. However, coming changes will increase this maximum income level to about $82,700 by 2025.

To fund CPP, workers and employers in Canada each currently pay 4.95 per cent of the employee’s earned income into the plan. Currently, when one retires at the age of 65, CPP pays a maximum annual pension of $13,110. With the upcoming changes to CPP, starting in 2019, contributions will increase by one per cent for employees and employers (and two per cent for the self-employed). Additionally, the annual payout target will increase from about 25 per cent of pre-retirement earnings to 33 per cent of pre-retirement earnings, and the new maximum annual pension at age 65 will be $17,478. These changes will mostly benefit those who are at least 10 years away from retirement, as well as those who do not have a defined-benefit pension plan through their employer. Ultimately the changes will provide greater income security for future retirees.

Employee contributions to the enhanced portion of CPP will now also be eligible for a full tax deduction over the tax credit received now. This will benefit those who have a higher marginal tax rate because while they will be contributing more, they will also receive a full tax deduction, which reduces their income dollar for dollar. Employers and small-business owners will be affected by these changes because they will have higher contribution costs.

Retirement age matters

•Wait until age 65 or later to retire, if you can. With the CPP, you can choose to receive monthly payments as early as age 60; however, doing so comes at a cost. There’s a reduction in the amount you’ll receive each month if you start collecting before the standard retirement age of 65. If you are able to wait, you will have more funds at the end. By continuing to work, these earnings will help maximize CPP and increase your overall pension income.

Currently, there will be a 7.2 per cent reduction for each year you retire and take CPP before the age of 65. So if you choose to start your benefits at age 60, your monthly CPP payments will be 36 per cent less than if you wait until 65. This will allow you to enhance your overall income in early years to finance your lifestyle.

Delaying CPP past age 65 has the opposite effect, providing a boost of 8.4 per cent annually (0.7 per cent monthly) for every year delayed through to age 70. This means if you wait until age 70 to start collecting, your monthly benefit will jump 42 per cent. A higher level of income can be appealing; however, one needs to watch one isn’t negatively impacting income-tested benefits like old age security, which starts getting clawed back with an income of $73,756.

Look at the whole picture. When it comes to choosing the date of your retirement, make sure to factor in your health and lifestyle. For example, if you’re in good health and long lives are common in your family tree, your decision to take CPP later might be much different than for someone who’s living with health issues.

Lastly, think about your saving and spending habits. If you are a conservative spender with strong budgeting skills, it may make sense for you to retire early as it is more likely that you can make your savings last. On the other hand, if you are not a strong saver or very financially savvy, you may want to wait until 65 or later to retire, so you can maximize the funds you receive from CPP and help ensure the longevity of your savings. People are now living longer, and it’s important to plan for retirement income that will last through your golden years.

David Lee is a financial adviser at BlueShore Financial and has more than 15 years’ experience in financial services. He is a certified financial planner (CFP), a recognized financial management adviser (FMA) and holds the elder planning counselor (EPC) designation. To learn more, visit www.blueshorefinancial.com