Should I defer my CPP or QPP?

For most Canadians, the Canadian Pension Plan or Quebec Pension Plan is the only guaranteed pension they’re going to get. So, a critical decision for your financial health in retirement is what age you opt to take your government pension. Once you start taking it, you can’t change your mind. So, you should be sure to understand your options and choose carefully.

The standard age to take CPP or QPP is 65. However, you can take your pension as early as 60 and as late as 70. If you choose to take your pension early, you will be penalized .6% for every month you collect it ahead of your sixty-fifth birthday. This means that if you take it at 60, your pension will be reduced by 36% compared to taking it at 65.

What does that mean in dollar terms? Well, the maximum payment amount at 65 is $1,204 a month in 2021. But most people don’t get the maximum, so let’s use the average payment instead.

The average pension that a newly retired 65-year-old Canadian receives in 2021 is $707 a month. The penalty for taking it at age 60 would bring that down to $452.

On the other hand, if you opt to take your pension after 65, you get an extra .7% for every month you wait. That adds up to 42% if you wait until age 70 and means the average pension would increase to $1,003 a month.

Now, let’s look at the factors to consider in deciding whether to defer your Quebec or Canada Pension Plan payments.

First up: Are you still working? You should delay taking your pension if you are still working, for several reasons.

1. As explained above, each year you delay taking your pension, you will be either avoiding a penalty for taking it before 65 or earning a bonus for taking it after 65.
2. You will also continue to contribute to the plan between 60 and 65—and to age 70 if you so choose—increasing your pension even more. You get the highest return on investment in the later years of contribution to the CPP or QPP because you get the benefit of those contributions so soon after making them.
3. The extra income you would get from your pension if you did take it while still working would probably mean it would be taxed at a higher rate, cancelling out some of the benefit of the extra money. Waiting until you are retired and presumably have lower taxable income means you get to keep more of those extra CPP or QPP dollars.

Now, how about if you stop working? Are you better off taking your pension or waiting? This is a little more complicated. By waiting, you avoid a penalty until you are 65 and get a bump-up after age 65, but you won’t be making contributions to the pension plan anymore.

Contributions to the CPP and QPP are mandatory for workers and the self-employed from age 18 until you start taking your pension between 60 and 65. From 65 to 70 contributions are voluntary. The size of your pension is based on 85% of your best contribution years between age 18 and when you start drawing your pension. By stopping work and discontinuing your contributions to the plan, you have fewer contributory years relative to the total number of years between age 18 and when you start drawing the pension.

The key question is whether the reduction from adding more non-contributory years to the calculation offsets the bonus you get for waiting to draw your pension.

I’ll save you the number crunching and cut to the chase. The answer is that the bonus for waiting always exceeds the penalty for having more non-contributory years added to the calculation.

For example, by waiting from 60 to 61 to take your CPP or QPP, the least possible improvement to your pension payment would be a 4.9% increase. Waiting from age 69 to 70, the least possible improvement would be 6.6%. If you worked and contributed to the plan in those years, the increase would be even higher. By waiting to collect your pension, you are giving up pension payments now to get higher payments down the road. For someone, who waits until they are 70, it will take until their early 80s to break even, depending on the assumptions you make.

This points to a few other key factors you should take into consideration.

• The first is the state of your finances. For most people, waiting to take CPP or QPP will mean drawing down their retirement savings for living expenses in those years. This can be an advantageous time to draw from your RRSP when you are in a lower tax bracket, which will also reduce the size of your future minimum withdrawals from your RRIF after age 71. However, it presupposes you have enough savings to support yourself until you start collecting your government pension. If this isn’t the case, then you may need to take your CPP or QPP early.
• The second factor is your health. Do you expect to live well into your 80s? If not, you should consider taking the cash sooner rather than later. Having said that, a bigger risk for many people is outliving their savings. On this count, waiting to take your government pension makes a lot of sense for a few reasons.
  • First, the government guarantees your pension will be paid to you for as long as you live. You’re not exposed to the risk that a market crash might reduce it.
  • Second, it’s indexed to inflation so rising prices will not eat into your pension’s buying power over the years.
• Third, the CPP and QPP are well-funded and sustainable. We believe the money will be there for you when you retire.

When considering the best time is to take your government pensions, the decision can be complex, so it’s always a good idea to get the advice of a qualified professional as part of a comprehensive retirement plan tailored to your unique circumstances.