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The penalties for taking CPP early tend to be harsher than adding zero-contribution years before retirement, a financial planner says.skynesher/iStockPhoto / Getty Images

This is the latest article in our series, Planning for the CPP, in which Globe Advisor explores the decisions behind when to take CPP benefits and reviews different aspects of the beloved and often-debated government-sponsored pension plan.

As part of this series, we invited readers to ask questions about their Canada Pension Plan (CPP) retirement benefits and found experts to answer them. This week, David Field, a certified financial planner who runs Papyrus Planning in Mississauga, reviews one reader’s situation.

I was trying to find information on the best time to start collecting CPP benefits if you have several years close to your retirement age that are zero-income years. My spouse and I both retired early. Some articles suggest taking CPP benefits as early as possible because of how the CPP formula factors in zero-income years. Still, I’m unsure if waiting until 70 would be a better option. I am 56 and had 32 maximum contribution years ending in 2023, with an additional seven years of partial contributions starting in 1985. My spouse is 62 and had 27 max contribution years ending in 2014, with six years of partial contributions starting in 1982 and zero contributions since 2015.

There are many factors to consider when starting your CPP retirement benefit. When analyzing the impact of zero-contribution years leading into your start date, the penalties for taking the retirement benefit early tend to be harsher than adding zero contributions. So, if you’re looking to maximize the amount you receive from the CPP, delaying is likely the best option.

The CPP is never straightforward. Those who have made significant contributions and expect a higher retirement benefit will likely be better off making more zero-contribution years and receiving the bonus for delaying the retirement benefit. Those with low contributions and the expectation of a lower retirement benefit will likely be better off starting their retirement benefit early, as the zero-contribution years will have a greater impact.

That’s all determined by the penalty or bonus for taking the CPP retirement benefit early or delaying it. This penalty is percentage-based and will reduce the calculated retirement pension by 0.6 per cent for every month taking the CPP before the age of 65 or increase it by 0.7 per cent for every month after 65. If your calculated retirement pension is larger, that percentage will have a greater impact in real dollars than if the pension is smaller.

Another question I have is regarding the pension calculator on the CPP website. Does it calculate the projected pension payments for ages 60, 65 and 70 assuming zero earnings for the future years until you reach these dates? Or does the calculation assume historical CPP contributions until 65? In my case, would the CPP website formula assume no more earnings from 2024 until I’m 60, 65 and 70 in the projected CPP benefit, or would it assume max contributions for the remaining years, as I have been at the maximum for the past 32 years?

The CPP retirement benefit estimates provided by Service Canada assume that individuals will continue contributing their average lifetime contributions (based on income) until starting the retirement benefit at 60, 65 or 70. This method is understandable as there’s no way to input any changes if you stop earning an income earlier or if your income exceeds your average lifetime earnings.

For you and your spouse, the result will be that your actual CPP retirement benefit will be lower than the estimates provided. Your result will be further off because you are nine years from 65 instead of three years for your spouse. For this reason, Doug Runchey, owner and operator of DR Pensions Consulting in the Comox Valley, B.C., and I created the CPP Calculator website for a more accurate retirement benefit calculation based on your future contributions – or lack thereof.

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