When is the best time to start taking CPP?

As Canadians begin living longer and longer the government is looking for new ways to keep us working longer too. One recent initiative was to revamp the Canada Pension Plan (CPP) rules to make it more attractive to put off drawing on CPP until we’re older.

As you can see in the chart below, under the current rules, if you live a normal lifespan of 83 years, you’ll get the biggest lifetime payout from CPP by opting to start payments at age 65. That has now changed.

Under the new rules, if you live an average lifespan, you’ll get the biggest lifetime payout by waiting until age 70 to begin drawing on CPP. The government has increased the penalty for taking CPP early across the board, so you’ll get a smaller lifetime payout by taking it early, however long you live.

As a general rule though, the method you should use for choosing when to start taking CPP won’t change under the new rules, which will be gradually phased in until they are in full effect in 2016: If you think you’ll die young, take CPP early. If you think you’ll live until 93, put it off as long as you can.

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Methodology:
1. All figures are in current 2011 dollars, to reflect current purchasing power which removes the effects of inflation. (CPP pensions are indexed for inflation so amounts will keep pace with inflation.) We have based the figures on the example of a CPP pension paying $800 a month if started at the regular retirement age of 65, which is less than the current maximum of $960 a month. No adjustment has been made for the time value of money.

2. Life expectancy at age 60, average of male and female. Source: Statistics Canada.

3. CPP pensions are reduced in 2011 by 6% a year for each year they are started earlier than the regular retirement age of 65, to a maximum of 30%. A larger reduction factor will be phased in during the period 2012-2016, after which pensions will be reduced by 7.2% a year for each year they are started early, to a maximum of 36%. The pension example we used pays $560 a month if started in 2011 at age 60. It will instead pay $512 a month in today’s dollars if started in 2016 or subsequently at age 60. The new adjustment factors will not affect pensions started in prior years.

4. CPP pensions are increased in 2011 by 6.84% a year for each year they are started later than the regular retirement age of 65, to a maximum of 34.2%. A larger increase will be phased-in until 2013, when pensions will be increased by 8.4% a year for each year they are started later, to a maximum of 42%. The pension example we used pays $1,074 a month if started in 2011 at age 70. It will instead pay $1,136 a month in today’s dollars if started in 2013 or subsequently at age 70.