New CPP rules affect plans

These rate changes may seem small, but they can affect your clients’ income significantly over the long term. For example, Tina Di Vito, head of Toronto-based Bank of Montreal’s Retirement Institute, predicts that a client who is 100% eligible for CPP, with a life expectancy of 90, will receive roughly $100,000 less in benefits if he or she begins receiving CPP at age 60 instead of 70.

Another significant change to the CPP affects clients who wish to begin collecting benefits while they are still working. Previously, as part of the work-cessation clause within the CPP rules, retirees would have to stop work altogether or significantly reduce their earnings in order to receive CPP benefits.

Starting in 2012, a client who is between the ages of 60 and 65 can continue to work full-time while collecting the CPP benefits for which he or she is eligible. The client and his or her employer must continue to make CPP contributions. Depending on the client’s income and the size of the CPP benefits, Di Vito warns, these mandatory contributions could push the client into a higher tax bracket and result in a lower net income for the client.

After age 65, CPP contributions by those who wish to work while collecting their CPP benefits are voluntary, while employer contributions will not be required.

In particular, women and newcomers to Canada will benefit from these changes, says David Ablett, director of tax and estate planning with Winnipeg-based Investors Group Inc. These people will have the opportunity to make up for employment gaps and low-income earning years, so they might qualify for higher pension benefits when they do retire.

Also, as of 2012, clients will be able to drop up to seven years or 16% of their low- to no-income years when calculating their CPP benefits. That’s an increase from 15% today. In 2014, that number will increase to 8 years or 17%.

To find the optimal age for your client to start receiving CPP, Ablett says, you first need to look at the break-even point and the client’s life expectancy. The former is the age at which the benefits for a client who starts CPP at age 60 would be surpassed by the amount they would receive had they waited until age 70 to start. Says Ablett: “It’s almost like a race.”

For example, if your client starts CPP at age 60 under the new rules, the break-even point is 73 years of age. In other words, had that client waited until age 70 to start receiving CPP benefits, it would take only three years for the client to receive an amount equal to what they would receive if they had started at age 60.

Life expectancy is vital in this calculation. If your client expects to live past age 73, then it’s worthwhile to wait until age 70 to receive CPP benefits. However, if the person has a lower life expectancy, it’s better to begin receiving benefits as soon as possible.

A client with a low life expectancy should consider receiving their CPP early because unused funds in the pension plan cannot be passed on to beneficiaries in the way monies in an RRSP or RRIF can.

Your client’s surviving spouse can receive CPP survivor payments, Ablett says, but only if the survivor’s own CPP payments do not exceed the monthly limit of $960. Otherwise, the estate of a CPP annuitant receives a one-time death benefit of $2,500.

Clients who can afford to invest their CPP benefits can move the break-even point out to age 75, says Ablett, assuming a return of 3% after taxes on the investments. In these cases, clients would be advised to begin their CPP benefits earlier.

Soon-to-retire clients should look at how their CPP benefits would affect their tax bills. If receiving CPP benefits in addition to other sources of retirement income — such as old-age security, employer pensions and RRIF withdrawals — means a higher tax bracket for the client, says Di Vito, it could mean overall lower net income.

As well, she adds, if the client’s income exceeds the OAS threshold, he or she may have to return part or all of the OAS benefits received in the previous year.  IE