People with their eye on early retirement need to take a careful look at changes to the Canada Pension Plan brought in earlier this year, as they could prompt some to put plans of quitting work before they turn 65 on hold.
One of the biggest changes is that a person's monthly CPP payment will cut by a larger percentage than before if a person takes it before they turn 65. Although the change didn't affect those who have already retired and started collecting their pensions provided they stay out of the workforce, those starting Jan. 1 this year were affected.
Tina Di Vito, head of the BMO Retirement Institute, said the first rule is that if you are retiring before 65 and need the money, you should start drawing your CPP pension immediately. There is no point in trying to delay your payments in hopes of getting more in the future if you need the cash today, she said.
But for those with some flexibility, the decision is more complicated and will depend on savings and other retirement income such as a workplace pension and Old Age Security payments.
"A lot of people look at it and say, 'When is my break-even point, should I take it early or late?"' Ms. Di Vito said.
"I kind of laugh when people say that, because I can calculate those numbers, that's no problem, you just assume an interest rate and bunch of different things ... but how can you tell someone to live to a particular age to make a decision on whether to take it early or take it late?"
If you decide to start receiving your CPP payments before 65, the amount is reduced because you will be receiving payments for longer than expected.
If you decide to start receiving your CPP payments after you turn 65 instead of when you turn 65, your annual payments will be more, because in theory you will be receiving payments for a shorter period of time before you die.
Before the changes that took effect in January, your CPP payment was reduced by 0.5 per cent for each month before age 65 that you began receiving it. So, if you started receiving it at 60, your pension amount was 30 per cent less than it would have been if you had waited to take it at 65.
From 2012 to 2016, the government will gradually increase the reduction to 0.6 per cent per month. The change means that, by 2016, if you start receiving your CPP at 60, it will be 36 per cent less than it would have been if you had taken it at 65.
However there is a corresponding upside.
Before the changes, your CPP payment was increased by 0.5 per cent for each month after age 65 and up to age 70 that you delayed receiving it to a maximum of 30 per cent.
From 2011 to 2013, the government will gradually increase this percentage to 0.7 per cent per month, a move that will mean that by 2013, if you start receiving your CPP at the age of 70, your pension will be 42 per cent more than it would have been if you had taken it at 65.
Patricia Lovett-Reid, senior vice-president with TD Waterhouse Canada Inc., said the reality is people take different paths in retirement.
"You may decide to take it early and then try and get a better uptake by investing it in the market," she said of CPP pensions.
Ms. Lovett-Reid said the rules before this year were marginally tipped in favour of those who opted to take their CPP pension early, while the changes put the system on a more neutral footing.
"You have to look at what your other retirement income sources are," she said.
"I encourage people to take a look at their tax situation and also whether your spouse's CPP retirement benefit entitlement is close to the maximum."
But Ms. Lovett-Reid also noted that retirement planning is about more than the cash you'll receive from the Canada Pension Plan.
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