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Giselle is worried about how her CPP may be affected when she starts to receive her pension and withdraw from her RRSP
Q: I am still working at age 63 and getting CPP. I will have a pension when I retire and I have an RRSP.
When I retire at age 70, I believe I will have to start withdraw from my RRSP.
Because I already have a pension, will my monthly CPP payout be reduced?
—Gisele
A: I find that a lot of Canadians are confused when it comes to their retirement income, Gisele. So you are definitely not alone. I’m going to try to clarify your concerns.
First, I’ll comment on receiving the Canada Pension Plan (CPP) before you retire, as this is an area that most people don’t understand. If you start your CPP retirement pension between age 60 and 65–as you did–you have to continue to contribute to the CPP while you are working. If you are between age 65 and 70, you have the option to opt out of contributing or you can continue to contribute. Contributions made after you begin your CPP will enhance your monthly pension through the Post-Retirement Benefit (PRB).
Continuing to contribute may provide a good “return on investment” in particular for conservative investors, those who expect a long life expectancy or married Canadians whose spouse is younger or who won’t receive the full CPP retirement pension themselves.
You asked about Registered Retirement Savings Plan (RRSP) withdrawals and to clarify, you don’t have to start taking withdrawals simply because you retire, Gisele. You may have no choice if you need the money, but RRSP withdrawals can happen as early as you want or as late as the year after you turn 71.
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By the end of the year you turn 71, you need to either convert your RRSP to a Registered Retirement Income Fund (RRIF) or purchase an annuity (a monthly payment from an insurance company in exchange for your RRSP savings). Payments must then start by the year you turn 72 at the latest. Most people convert their RRSP to a RRIF and then start to take at least the minimum required withdrawal mandated by the federal government (based on your age) or more if needed for cash flow.
CPP is not reduced because you have RRSP or pension income. CPP is what it is based on your entitlement from your historical contributions. I suppose you could say that it is indirectly reduced by income tax payable on your pension, so planning when to take CPP, RRSP/RRIF withdrawals and company pensions should be considered so you can pay the least tax possible. Nonetheless, Gisele, your gross, pre-tax CPP pension is predetermined and not impacted by other income sources thereafter.
On the other hand, the Old Age Security (OAS) pension may be reduced based on other sources of income. If your net income on line 236 of your 2015 income tax return exceeds $72,809, your OAS pension will be reduced by 15 cents on every excess dollar for the July 2016 through June 2017 payment period.
A common area of confusion with pensions is how CPP integrates with a company pension, Gisele. It’s important to understand that when you take your company pension has no impact on your CPP entitlement. And when you take your CPP has no impact on your company pension entitlement.
Pension plans may take into account a notional integration of the CPP if you retire before age 65. Some pensions calculate your monthly pension payment so that you get a higher pension until age 65 and then a lower pension after age 65. The higher payment before age 65 is based on the assumption that age 65 is the typical CPP/OAS date and that pensioners may need more pension income before age 65 and less afterwards. But your pension plan and CPP don’t talk to each other and modify your payments – they are independent.
Hopefully this provides some clarity for you, Giselle. It’s important to understand your various sources of retirement income, the way they work, how they are taxed, how much you need and so on. A lot of people are ostriches when it comes to retirement planning, but whether we like it or not, retirement will eventually be upon us all.
Ask a Planner: Leave your question for Jason Heath »
Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto, Ontario. He does not sell any financial products whatsoever.
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I have been retired from the federal government since May 30/15. I been collecting a monthly government pension and I am 64 years old. I have received letters from CPP & OAS telling me that I now qualify to apply for both. I’m undecided as to what would be in my best interest, wait until I reach 70 to collect CPP or continue with my government pension?
Response from the MoneySense editorial team:
Hello Debbie, thank you for your question.
Due to the large volume of comments we receive, we regret that we are unable to respond directly to each one. We invite you to email your question to [email protected], where it will be considered for a future response by one of our expert columnists. For personal advice, we suggest consulting with your financial institution or a qualified advisor.
Great explanation thanks
i am taking my cpp , i started last year at age 61 how ever iam still working .my question for you is should there not be an increased other than the one percent for inflation.
“Some pensions calculate your monthly pension payment so that you get a higher pension until age 65 and then a lower pension after age 65. The higher payment before age 65 is based on the assumption that age 65 is the typical CPP/OAS date and that pensioners may need more pension income before age 65 and less afterwards.”
NOT true if you are a retiree from the federal government. Your defined benefit plan automatically is reduced by the amount it would otherwise pay out on the average earnings used by CPP at age 65. CPP pays a lower percentage of your average earnings than does your defined benefit plan, so net starting at age 65 your all in pension income DECLINES, and this occurs regardless of whether you take CPP at age 65 or 70.
my husband is applying cpp he still working has a pension plan on the application ask if they wantvuou to deduct from his cpp whst does he put for the answer
Due to the large volume of comments we receive, we regret that we are unable to respond directly to each one. We invite you to email your question to [email protected], where it will be considered for a future response by one of our expert columnists. For personal advice, we suggest consulting with your financial institution or a qualified advisor.
I retired early at 55. Company buyout and my health. I am confused as to why my company pension will be cut in half at the age 65?
Why do they reduce our hard earned pension at 65?
What happens when you have two RPPs? I have an Ontario Teachers’ Pension, along with a Canadian Forces Reserve Pension. These two RPPs do not communicate. When I turn 65, will both of these RPPs take into account that I will be receiving CPP, and both reduce accordingly? If so, this would seem like my pension payments would be reduced twice for the same reason.
Is there a common formula for “bridge financing” in the context of employment pensions affected by CPP after age 65 ?
I understand that my pension includes a portion that serves as a bridge, an increased amount that will be reduced after I begin collecting CPP.
I’m almost 63 and planning on collecting CPP at 65. How can I determine how much my employer pension “bridge financing” will be reduced when I start collecting CPP ?