CPP changes could affect you

The Canada Pension Plan (CPP) is changing, with some new rules taking effect as early as 2011. The changes will affect people about to start collecting CPP retirement benefits, as well as those already drawing them. Here are some tips on how the changes might affect you from Chartered Accountant Tina Di Vito, head of the BMO Retirement Institute in Toronto.

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You won’t have to stop working to collect CPP early – “Currently, you have to stop working or significantly reduce your earnings in order to quality for CPP retirement benefits before age 65,” says Di Vito. “Beginning in 2012, this requirement will be eliminated.” The changes may benefit you if you had little or no income for several years – “The calculation of CPP retirement benefits includes a general adjustment that allows for a drop-out of a certain number of low earning years,” explains Di Vito. “Currently, the drop-out percentage is 15 per cent. It will increase to 16 per cent in 2012 and to 17 per cent in 2014. This change will improve your CPP benefits if you have had several years of low or no income.” You will be able to contribute to CPP while receiving benefits – “Under the current rules, once you start receiving CPP retirement benefits you are not required to make further CPP contributions, even if you return to work,” explains Di Vito. “Beginning in 2011, if you are taking CPP retirement benefits before age 65 and continue to work, you and your employer will be required to make CPP contributions. After age 65, you may choose to continue to make contributions, and, if you do, your employer will also be required to contribute. Additional contributions may increase your CPP benefits.” The calculations for early and late take-up of the CPP are changing – “Under the current calculations, your CPP retirement benefit may be reduced or increased by up to a maximum of 30 per cent, depending on when you start collecting,” says Di Vito. “As a result of the changes, your CPP retirement benefit may be reduced up to a maximum of 36 per cent or increased up to a maximum of 42 per cent, depending on when you start collecting.” Changes to the early pension reduction will be phased in over five years, beginning in 2012, while changes to the late pension augmentation will be phased in over three years, beginning in 2011. “This may be an important consideration if you have to decide whether to start receiving early CPP benefits in the next few years.” Think carefully about when to draw your CPP benefits – “If you need the CPP income, your decision will be different than someone who doesn’t need it,” advises Di Vito. “Consider how long you think you might live, given your personal health and family history.” Also keep in mind that if you take CPP benefits early and keep working, you will have to keep contributing until age 65. Compare how you will fare under the current and new rules – “The new rules create an even greater incentive to delay taking your CPP,” Di Vito says. “But if you’re under 65 and won’t be returning to work, taking your CPP under the current rules will be more beneficial.” Talk to your Chartered Accountant – “Your personal income tax rate, your sources of retirement income and income-splitting opportunities will influence what is right for you when it comes to the opportune time for you to draw your CPP retirement benefits,” says Di Vito. “A CA can help you develop your best CPP strategy by considering all aspects of your personal situation.” Brought to you by the Institute of Chartered Accountants of Ontario