Last year the Federal Government introduced changes to how the Canada Pension Plan will work. These changes have been enacted into law and will take effect as of January 2011. The changes will impact how investors time and plan their retirement and when they pay into and draw from Canada Pension Plan.

From Great-West Life and Mackenzie Investments:

These days, some Canadians want to retire early, while others want to keep working past 65. Many more wish to ease into retirement by continuing to work part-time. Regardless of individual circumstances the following changes will impact most Canadians.

On May 25, 2009, The Minister of Finance outlined proposed changes to the Canada Pension Plan (CPP). The goal, according to a Department of Finance paper released to coincide with the announcement is to “better reflect the many paths people take to retirement” and to “provide greater flexibility for older workers to combine pension and work income if they so wish; modestly expand pension coverage; and improve fairness in the plan’s flexible retirement provisions.” These changes were included in Bill C-51, which received Royal Assent on December 15, 2009.

These changes, which will become effective between 2011 and 2014, will benefit workers to differing degrees depending on their age, history of earnings and their ability or desire to work past age 60.

If you are currently collecting CPP retirement, disability or survivor benefits or will begin collecting your pension prior to 2012, you will not be impacted by these changes unless you are a CPP recipient who continues to work.

How it works:

1) Pension Adjustments for early and late CPP pensions

Possibly the biggest change is an increased incentive to wait to collect until you are 65, or at the latest, age 70. Currently, the age for Canadians to begin receiving CPP benefits is age 65, as with Old Age Security. It is possible to opt to receive early CPP, as early as age 60, even if you continue to work.

There is a catch: a reduction of benefits. The early pension reduction will be increased, over a period of 5 years starting in 2012 to 0.6% per month for each month that the pension is taken before age 65. The late pension augmentation will be gradually increased to 0.7% per month for each month that the pension is taken after age 65, up to age 70. This will be phased in over a period of 3 years, starting in 2011.

2) Continued CPP participation while receiving benefits

Currently, CPP contributions are no longer paid once you begin receiving a CPP retirement pension, or once you reach age 70, whichever is earlier. With the changes enacted, a person under 65 who chooses to receive CPP benefits may continue working and thus continue to earn CPP benefits, but will be required to continue contributing to CPP to age 65. Your employer will also be obligated to continue contributing as well.

Currently, employees over age 65 who work while receiving a CPP pension can no longer contribute to the CPP. These employees, as of 2012, will be able to voluntarily elect to make CPP contributions until age 70. If a pensioner elects to contribute, his or her employer will also be required to contribute.

Although this could cost working retirees hundreds of dollars more a year in payroll deductions, these contributions will result in increased retirement benefits, even for persons already receiving the maximum pension amounts. Employees will receive an additional CPP pension benefit of up to 2.5% of the maximum CPP pension. This could represent, in current dollars, 2.5% of $10,905 or $273 for
those at existing maximums. The exact amount depends on the earnings level of the contributor. Additional CPP pension ‘purchased’ in any one year will commence in the following year, subject to any applicable early retirement reduction. The effective date of this measure is 2011.

3) Change in calculating average career earnings

CPP uses a career average calculation which allows for certain years of low or no earnings to be disregarded in arriving at average earnings. If you take the CPP at age 65, the span of your career is considered to be 47 years. If the CPP is taken at age 60, the span of your career is considered to be 42 years. Currently, 15% of an employee’s potential working career may be disregarded. Under the proposed rules, the drop-out percentage will be increased as follows:

• to 16%, in 2012. This would allow a maximum of 7.5 years to be dropped, based on a working career of 47 years (age 18 to 65)
• to 17% in 2014. This would allow a maximum of eight years to be dropped.

This provision will help more Canadians come closer to the maximum CPP pension, especially those for whom 2008 and 2009 were not the best years. This change will also increase the average CPP disability and survivor pensions, which are based on the retirement benefit calculation.

4) Removal of the Work Cessation Test

Under current rules, in order to qualify for a CPP benefit before age 65, you must not earn more than a certain amount in the month the CPP pension commences or the month before. Currently this amount is approximately $900. This earnings test is referred to by the government as the “Work Cessation Test”.

Under the new rules, the Work Cessation Test will be removed for employees who commence their CPP pension in 2012 and later. However, as discussed earlier, employees under the age of 65 will be required to continue to contribute while working in return for an
increased benefit.

Summary – What all this means

Some analysts interpret the changes as a disincentive to early retirement. Others see these changes as an attempt on the part of the Government to gradually alter behavior and encourage Canadians to remain at work longer.

The nature of the changes may shift the advantage to retiring later if you need more years to qualify for a maximum benefit, but not if you need extra income right away.

We can help you work through the process of deciding when to begin receiving your CPP benefits. During this discussion please keep these topics in mind:

• Your earnings history under the CPP, the dropout provisions and phase-in reductions.
• Total sources of income in retirement beyond the CPP. The early retirement decision for many Canadians involves much more than just considering CPP. If you are a member of a Defined Benefit plan there may be an incentive to defer retirement. If, as an increasing number of Canadians, you are a member of a Defined Contribution plan, or are funding your retirement with RRSPs, you could have an incentive to delay retirement to grow your portfolio to your desired level.
• Your goals regarding retirement, and the amount of retirement income which will be needed to make those dreams reality.
• Whether you need to live on CPP income, or whether you can afford to invest it. If you have the ability to invest your CPP income, that would actually encourage you to start your CPP early and not wait until 65. Using a Tax-Free Savings Account (TFSA) can help you maximize your CPP benefits.

Contribution rates remain at 9.9% but changes may be in the wings. Federal and provincial policymakers are expected to make
recommendations for changes in the near future.

For more information, go to the CPP website at:

http://www.servicecanada.gc.ca/eng/isp/cpp/cpptoc.shtml

or call our office to arrange an appointment with a financial advisor.

Photo credit: “Ottawa, Canada – Changing of the Guards” by ajk2n

2008 will definitely go down as one of the most dramatic years of our lifetimes.  Whether it was political (Google: Canada+coalition, Google: Obama+McCain), economical (Google: subprime, Google: bailout), or environmental (Google: cold+snap+Canada), something happened to put a shiver down anyone’s spine!

So what does it all mean to you and me?  If you had money invested in the markets at the beginning of the year, you likely had less at the end.  The global economic meltdown is now considered the worst since the Great Depression, and had such broad impact that there was literally no “safe haven”, no country or industry not affected. The silver lining around this dark cloud is that all of these assets are now trading at much lower prices than they were a year ago; for anyone putting money into the markets, this may end up being the greatest buying opportunity of our lives.

“Be fearful when others are greedy. Be greedy when others are fearful.” — Warren Buffett

Those of us who have lost money last year, now is the best time to sit down with a financial advisor (we know a couple good ones here) and look at rebalancing your portfolio.  Sometimes when investors see an asset drop in value, their immediate reaction is to sell it and move whatever money is left into another asset that has been doing well.  This “Buy High, Sell Low” approach is the reason many people lose money when they make snap decisions based on emotion.  But with nearly every market down right now, you can make some moves to realign your portfolio without worrying about “locking in” your losses.

Talk to your advisor about a plan to be in position for your investments to take advantage of the market recovery.  No one knows exactly when it will be, and by the time it’s obvious to everyone the lion’s share of the returns will be past.  If you really want to get the most out of the rebound, consider making additional monthly contributions to your portfolio.  If you have not started a savings plan yet, you can start small ($25 a month goes a long way over your life), but start now.

Finally, I highly encourage everyone to look at the new Tax-Free Savings Accounts available now.  This is a perfect vehicle for short to medium term savings goals (house, car, education) as well as retirement planning that can complement any plan you have in place today.  If you plan to maximize your RRSP, this is a fantastic way to further protect your assets.  Again, it’s also a perfect place to start saving if you haven’t before.  If you are over 18 you can deposit up to $5,000 this year, you can take it out any time without penalty or repayment (or affecting any income-tested benefits, such as OAS), and any growth is yours tax free.

/Michael

If you have any questions, please leave a message in the comments below, or contact us in the office. Happy New Year!