CPP changes coming at beginning of 2012

Here are the coming changes to our national pension plan.

CHANGE 1

Monthly CPP pension amount increases by a higher percentage if you take it after age 65.

Prior to the change, your clients’ CPP retirement pension increased by 0.5% for every month after age 65 they delayed receiving it—up to age 70.

Year of retirement	% (monthly increase)
2011	0.57
2012	0.64
2013	0.70

So if a client delayed receiving his benefit until age 70, his yearly benefit amount was 30% higher than it would have been had he started drawing CPP benefits at age 65.

The government is gradually increasing this percentage from 0.5% per month (6% per year) to 0.7% (8.4% per year).

EXAMPLE 1

Bill plans to retire and start drawing CPP benefits in 2016, at age 66. If he started taking his CPP benefits when he turned 65, his annual pension would have been $9,430.

Before the change:

Bill’s yearly benefits increase by 6% (0.5% x 12 months), or $565, for a total benefit of $9,995 per year.

After the change:

Bill’s yearly benefits increase by 8.4% (0.7% x 12 months), or $792, for a total benefit of $10,222 per year.

Difference: $227 per year

CHANGE 2

Monthly CPP pension amount decreases by a higher percentage if you take it before age 65.

Before the change, your clients’ CPP retirement pension decreased by 0.5% for each month they started receiving it before age 65.

Year of retirement	% (monthly increase)
2012	0.54
2013	0.54
2014	0.56
2015	0.58
2016	0.60

So if a client started receiving her benefit at age 60, her yearly benefit amount was 30% less than it would have been had she started drawing CPP benefits at 65.

From 2012 to 2016, the pension reduction will gradually increase from 0.5% to 0.6% per month(7.2% per year).

EXAMPLE 2

Emily will have an annual CPP benefit of $9,026 if she retires in 2025 at age 65. But she decides to retire at 60 and begin taking CPP then.

Before the change:

Emily’s yearly benefit decreases by 30% (6% [0.5% x 12 months] x 5 years), or $2,707, for a total benefit of $6,319 per year.

After the change:

Emily’s yearly benefit decreases by 36% (7.2% [0.6% x 12 months] x 5 years), or $3,249, for a total benefit of $5,777 per year.

Difference: $542

CHANGE 3

Beginning in 2012, the number of low or zero earnings years dropped from the calculation of CPP pensions will increase.

Before the change:

Prior to the change, the calculation of average earnings involved dropping 15% of clients’ lowest earnings. This means up to seven years of their lowest earnings were dropped from the calculation.

After the change:

In 2012, the percentage will increase to 16%, equating to a maximum of 7.5 years of clients’ lowest earnings being dropped from the calculation. In 2014, the percentage will reach 17%, allowing for eight years of their lowest earnings to be dropped.

CHANGE 4

Beginning in 2012, the “work cessation test” will no longer apply.

Before the change:

Taking the CPP pension before 65 meant clients had to stop working or reduce their earnings considerably for at least two months. Following this period, clients could return to work or increase their earnings.

After the change:

Beginning in 2012, clients can take their CPP pension without having to stop working or reduce their earnings.

The rationale, says Service Canada, is retirement for many Canadians is “a process that often occurs in stages, rather than a one-time event. By eliminating the work cessation test, it will be easier for Canadians to make a gradual transition to retirement.”

CHANGE 5

The Post-Retirement Benefit (PRB)

The PRB is a new lifetime benefit, and like the CPP it increases with the cost of living.

If you work outside of Quebec and are receiving CPP or QPP pension benefits, you’ll start making CPP contributions toward the PRB beginning January 1, 2012. The benefits will be paid out the following year.

Contributions to the PRB are mandatory if:

• You’re aged 60 to 65; and
• You earn an income in Canada(outside Quebec); and
• You’re receiving CPP or QPP pension benefits

Contribution Rates:

• 4.95% of pensionable earning for employees
• 4.95% for employers
• 9.9% for self-employed workers

CROSSOVER POINT

Clients still have to choose between taking CPP at age 60 or age 65. But now that they don’t have to stop working to take the CPP, they have to consider the benefits of contributing until 65.

That means knowing what the crossover point is for clients: the age they have to live until to make it wiser to delay taking CPP until age 65. Under the new rules, the crossover age will move from 75 to 73. If your client thinks he won’t live until then, he could consider taking the CPP at age 60.

Age	2011 Reduction	2011 Income	Crossover Age 2011	2016* Income	Crossover Age 2016
60	-30%	672	76.7	614	73.9
61	-24%	730	77.7	683	74.9
62	-18%	787	78.7	753	75.9
63	-12%	845	79.7	822	76.9
64	-6%	902	80.7	893	77.9
65	0%	960		960
66	6.84%	1026	81.7	1040	76.9
67	13.68%	1091	81.7	1121	76.9
68	20.52%	1157	81.7	1202	76.9
69	27.36%	1223	81.7	1283	76.9
70	34.20%	1288	81.7	1363	76.9

Source: Daryl Diamond. Assumes entitlement to the maximum benefit at 65. *Projected using 2011 payment rates for comparative purposes.

Dean DiSpalatro is senior editor of Advisor Group.