When it pays to take CPP early

Deferring government benefits past age 65 means eventually receiving higher payouts. But in the following situations, you’d be well advised to take Canada Pension Plan or Old Age Security as soon as you can after you retire:

You’re in poor health. The age-adjustment factors that reward you for deferring government benefits are meant to be “actuarially neutral,” which means they are intended to provide no major financial advantage or disadvantage if you have average life expectancy. However, if you think you have reduced life expectancy because of poor health, then consider starting benefits as soon as you’re eligible.

You had several low-income years during your career. CPP calculations are based on averaging your contributions and “pensionable earnings” from age 18 until you start taking the benefit. But the government allows you to drop 17% of your lowest earning years—plus additional years for child-rearing or disability—from the calculation. That works out to eight years if you retire at 65.

If you have used up all your drop-out years when you retire before 65 and don’t start CPP right away, then you’ll keep adding zero-earning years to the averaging calculation. In that situation, deferring CPP will bring your basic entitlement down.

You expect to get GIS. If you expect to receive the low-income Guaranteed Income Supplement and retire before 65, you’re generally best off starting CPP immediately at a reduced rate. That’s because every $1 of CPP payout reduces your GIS entitlement by about 50 cents when GIS starts at age 65 or later. (Note that your Old Age Security benefit has no impact on your GIS entitlement.)

Your portfolio is beaten down. The decision to defer government benefits includes an element of market timing. Since you’ll be dipping into your nest egg sooner to meet your spending needs, that strategy makes more sense if you think it’s a good time to sell investments. If you retire during or after a bear market, starting government benefits earlier will reduce your need to sell investments at beaten-down prices and give your portfolio a chance to recover.