When to apply for government benefits
Inflation or not, this is an important decision. Clients can choose to receive their Quebec Pension Plan (QPP) or Canada Pension Plan (CPP) benefits as early as age 60. However, delaying benefits is often the best choice, no matter how you run the numbers.1 Of course, you need to assess each Client’s specific situation. It may be inappropriate to annuitize if the client has a shortened life expectancy.
For individuals who take CPP/QPP before age 65, the amount that they otherwise would have been entitled to at age 65 is reduced by 0.6% for each month that it is taken early, so at age 60 it is reduced by 36%.
For individuals who decide to delay CPP/QPP after age 65, the amount that they otherwise would have been entitled to at age 65 rises by 0.7% for each month that it is deferred, so at age 70 it is increased by 42%.
But this doesn’t tell the whole story. CPP/QPP benefits are adjusted annually for inflation, so it does provide some level of inflation protection for Clients. And for those who delay receiving their CPP/QPP benefits, their entitlement will also be adjusted by the CPI growth. It affects the CPP/QPP benefit calculation in a way that often increases the delay incentive and also heightens the penalty for taking benefits early’.1
Only 1% of people wait until age 70 to receive their CPP/QPP pension benefits. The Canadian Institute of Actuaries estimates that 25% of Canadians are financially healthy enough to wait until age 70 before they start to collect their pension. But 95% of Canadians start to collect benefits before age 65 or at age 65.
Deciding whether to collect CPP/QPP benefits early or at age 65, or to defer to a later age, is a choice that needs serious consideration. To facilitate the deferral decision, one interesting option is to purchase a term certain annuity to bridge a Client’s cashflow needs until they start to receive the CPP/QPP benefits at a later date. The annuity will produce a steady and reliable source of income for the retiree.
One of the most important factors affecting any decision is whether the Client’s retirement plan can withstand the ups and downs of inflation, and when it can’t. It’s worth considering the use of solutions, like a term certain annuity, that can provide the Client with a guaranteed income source, customized to adjust annually for inflation, similar to that of CPP/QPP.
