When to elect your CPP pension

Since the CPP pension plan pays you inflation-adjusted money for life, you win if you live long and you lose if you die young. So, what’s the best age for you to elect?

The normal age to start receiving the CPP retirement pension is 65, but you can elect to begin as early as 60 or wait as long as 70. If you choose to start earlier than 65, you’ll incur a penalty of 7.2% per year, and if you wait until after age 65 you’ll get a premium of 8.4% for every year you delay. So, what’s the best age for you?


It’s a complex decision that can be made somewhat easier with the use of a spreadsheet.


But before we get into the numbers, let’s start with a discussion about life.


The main problem with determining the answer is that you don’t know how long you are going to live. Since the CPP is a defined benefit pension plan that pays you inflation-adjusted money for life, you win if you live long and you lose if you die young.


What about you? Is there a history of shorter lifespans in your family, or do you have some kind of ailment that might limit it? If so, start thinking about taking your CPP earlier. Another issue is whether you need the money. If you are having problems paying the bills, forget the math and start as soon as possible.


OK, let’s say a normal lifespan is likely and you don’t need the money. The rough rule of thumb says waiting until age 70 to start is optimal if you assume you’ll live to at least 83. The problem is that this basic analysis ignores the time value of money. It treats a dollar received today the same as one received 10 years from now. That’s misleading and therefore so is the conclusion.


Here’s where a spreadsheet can help. The spreadsheet should factor in the penalties and premiums and assumes CPP will increase by the average it has done over the past five years. It should calculate the net present value of all future after-tax CPP amounts at your personal discount rate to calculate the optimal age to start collecting.

When to elect your CPP Pension: chart


The problem is that figuring out your personal discount rate is not that easy. One solution is to use the highest personal interest rate on any debt you have. A credit card revolver accruing interest at 18% on the balance would use that rate while someone with only 5% mortgage debt would use that lower rate.


Using a 5% discount rate yields the results in the table below. What about the credit card revolver? At a discount rate of 18%, the answer is 60 no matter how long the lifespan since early money is so much more valuable. The other issue is income tax. Since the CPP is a taxable  pension, you’ll have to pay tax at your marginal tax rate when you receive it. That means the more money you earn during retirement, the less you’ll receive from CPP.


Interestingly, while your marginal tax rate will impact the CPP funds you’ll be able to spend and the net present value of the future receipts, it doesn’t seem to change the best age at which to elect because it affects all discounted net present values the same. In other words, the table above does not seem to change regardless of what the marginal tax rate is.


One last thing — the dreaded post-retirement benefit. The PRB requires you to continue to pay regular CPP premiums on employment or self-employment income from age 60 to 65 even if you are receiving the CPP pension (you can opt out from 65 to 70). The problem is, the maximum PRB increase you’ll get the next year due to paying a full year’s CPP premium is 1/40th of the next year’s maximum CPP pension. For example, if you paid the maximum CPP premium of $2,544.30 in 2016 ($5,088.60 if self-employed), you’d get an increase of only $334.25 in your CPP in 2017. That is 1/40th of the maximum CPP pension of $13,370 in 2017. That’s because your one year’s payment is funding your PRB for the rest of your life. In simple terms, that means you’d have to live 7.5 years to get your premiums back (15 years if you are self-employed). Many people conclude that’s not a great deal, so they don’t consider electing until they stop working.


Give some thought to your situation, then crunch the numbers to make the CPP-election-age decision with confidence.