Clark Wealth Management Group - ScotiaMcLeod Fredericton

Today Canadians are healthier, better educated and living longer. For some, this means they could live in retirement as many years as they worked. This puts incredible strains on both private and public pension systems. To this end, the Canada Pension Plan (CPP) will undergo some dramatic changes and evolve. These changes will be gradually phased in over five years starting this year. They are essentially using both a carrot and a stick to get older workers to stay in the workforce longer.

Under the current legislation you can start your CPP at age 60 but the pension benefit is reduced by 0.5% per month for each month before the recipients 65th birthday to a maximum of 30%. If you delay your CPP until after age 65, the pension benefit is increased by the same amount.

The new legislation increases the penalty paid by those who choose to start their CPP earlier than 65. Over the next five years the pension benefit will gradually be reduced by 0.6% per month for each month before the recipients 65th birthday to a maximum of 36% from 30%.

The new rules will also reward additional years of work. By taking the CPP after the age of 65 the pension benefit is increased by 0.7% per month for each month to a maximum of 42% up to age 70. This change will be brought into effect gradually over a three year span beginning in 2011.

Also under the new rules if an individual is under the age of 65, collecting CPP, and working the individual and their employer will have to continue contributing to the CPP. If the individual is between 65 and 70, they can opt to continue making contributions to the CPP and continue to build their pension. The additional contributions may increase retirement benefits by 2.5% of the maximum pension amount per year of additional contributions depending on the individual’s earning level.

As of 2012 you no longer need to stop working (or pretend to stop) in order to qualify for CPP as early as age 60. This allows a phased in retirement or a supplement to employment earnings.

For those who have had to leave the workforce for things like education or caring for family members, they have also increased the general drop-out provision to exclude 17% (from 15%) of periods of low or no earnings from the benefit calculation.

The amount of monthly CPP benefit an individual can receive depends in part on how many years they contributed to the plan. The current CPP rules are based on a 47 year career. A “drop-out” provision gives an individual who takes their CPP at age 65 the ability to drop almost 7 years of low or no earnings from the calculation of their average career earnings.

Under the new legislation, the general drop-out provision would increase to 16% in 2012 (allowing a maximum of almost 7.5 years to be dropped) and to 17% in 2014 (allowing a maximum of 8 years to be dropped).

If you would like additional information on these important changes, please get in touch with your financial advisor or Service Canada by phone at 1-800-622-6232. You can also find the information on-line at http://www.servicecanada.gc.ca/eng/isp/pub/factsheets/postrtrben.shtml

Keir Clark, is a senior wealth advisor, with Clark Wealth Management Group, associate director wealth management and branch manager at ScotiaMcLeod in Fredericton, NB. He can be reached online at www.keirclark.ca or by telephone at 506-450-6465.

Information and opinions contained herein have been compiled from sources believed reliable but no representation or warranty, expressed or implied, is made as to the accuracy or completeness.