On January 1st, 2011 a number of changes to the Canada Pension Plan came into force. These changes will be gradually implemented however once fully implemented, they will significantly affect the penalty for taking a pension early (between age 60 and 65) and the benefit for taking a pension late (after age 60 up to age 70). In addition there are new rules for employees who may wish to collect a CPP pension and continue working. The new rules are summarized as follows.
Collecting CPP Pension Before Age 65
Previously, if employees elected to receive their CPP pension before age 65, their benefits would be reduced by .5% for each month (6% per year) that their pensions commenced before age 65. Starting in 2012, pensions will be reduced by .6% for each month (7.2% per year) that employees elect to commence their pension before age 65 (i.e. an employee’s pension would be reduced by 36% if he or she elected to receive it at age 60).
Collecting CPP Pension After Age 65
Previously, for each month after age 65 that employees delayed collecting their CPP pensions, the pension benefits increased by .5 % per month (6% per year). Commencing this year, for each month after age 65 that employees delayed collecting their CPP pensions, their pension benefits will increase by .7% per month (8.4% per year). This means that if employees delayed collecting their CPP pensions until age 70, their benefits would be 42% greater than if they had started collecting them at age 65.
Collecting CPP Pension While Working
Prior to these latest rule changes, employees were permitted to collect their CPP pensions and also work, and neither the employees nor their employers were required to make further CPP contributions. Now, employees and employers will be required to make CPP contributions if the employees are under age 65, and they may make contributions if the employees are over age 65. The benefit to employees with these new rules is that the additional contributions will go towards new “Post-Retirement Benefits” that will be paid to employees (increasing their total CPP pension benefits) starting in the year following the year the new contributions were made.
Also, in order to collect CPP pension benefits before age 65, employees had to have an interruption in income (this was called the “work cessation test”). This effectively precluded the ability for anyone under age 65 to continue working in their current position while electing to collect a CPP pension. Starting in 2012, this work cessation test will no longer apply, so employees may elect to take their CPP pension as early as age 65 without having to interrupt their earnings.
These new changes will change CPP pension benefit levels depending on the scenarios described above which may affect employees’ decisions regarding the age they want to retire. For employers, any changes to employees’ decisions regarding retirement dates will affect their manpower planning. Thus, employers who have employees who are or may be contemplating retirement in the next few years will want to ensure that those employees understand these changes in advance of any planned or expected retirements.
