CPP Post-Retirement Benefit: Options for Workers 65+
Deciding when to start Canada Pension Plan (CPP) benefits is a major financial decision. Payments are larger for those who wait until age 70 to begin benefits, but this isn't the right choice for everyone.
The less well-known CPP Post-Retirement Benefit (PRB) add complexity to this choice. It allows you to start your CPP benefits early and still contribute to the plan to increase your retirement pension. The downside is that you won't be able to benefit from the full deferral increase.
In this article, we’ll look at the post-retirement benefit and why workers aged 65 and older may want to consider earning it. We'll also cover three important factors to help you decide if it's the right choice for you.
CPP Basics
The Canadian Pension Plan (CPP) is one of the main sources of retirement income for many Canadians. Not only are payments guaranteed for as long as you live, but they also increase each year with inflation.
The amount your CPP retirement benefit is based on:
Your contributions made during your working years
The age that you start receiving benefits
The 2024 maximum monthly CPP benefit at age 65 is $1,364.60. ($16,375.20 annually).
The default age for starting CPP is 65, but you can begin payments as early as 60. The downside of starting early is that the payments are smaller for the rest of your life. The reduction is 0.6% for each month you start before age 65, which means your pension will be 36% smaller if you start at 60.
There is also an option to delay your CPP in exchange for larger monthly payments. The increase is 0.7% for each month you delay benefits, up to age 70. The maximum deferral benefit tops out at a 42% increase at age 70.
CPP Post-Retirement Benefit
The Post Retirement Benefit (PRB) doesn't receive much attention, but it can be an attractive option for some. It allows those who have already started their CPP retirement benefits to increase their pension with each additional year of work.
To be eligible to earn the PRB you must:
Be between 60 and 70 years old
Working and contributing to CPP (In Canada, but outside of Quebec)
Have started receiving your CPP retirement pension
Note: Those working in Quebec would instead earn a retirement pension supplement.
Your PRB amount depends on two factors:
Your earnings and contributions from the previous year
Your age on January 1st of the year the Post-Retirement Benefit starts
Each year you contribute to CPP after beginning your CPP retirement pension will result in PRB income starting the following year. These PRB payments will continue for the rest of your life and they also receive inflation adjustments. Over time, this can significantly increase your total pension income.
For those age 65, the maximum monthly post-retirement benefit for 2024 is $44.46 ($533.52 annually)
Critically, the size of the PRB benefit depends on your age each year that you contribute and earn new PRB income. Similar to the age adjustment for starting CPP retirement early or late, the size of the PRB will be smaller for those under 65 and larger for those over age 65.
PRB Contribution Rates
The PRB contribution rate is the same as regular CPP contributions.
You may have noticed that your CPP contributions have gone up in the last few years. This is due to the CPP enhancements which began in 2019.
There are now two components to CPP contribution rates:
Base CPP (5.95% on earnings up to the YMPE)
CPP2 (4% on earnings between the YMPE and the earnings limit)
The 2024 maximum combined CPP/CPP2 contribution amount is $4,055.50.
The maximum contribution is doubled ($8,111) for self-employed individuals who must pay both the employee and employer portions.
You can choose to stop contributing to CPP if you're still working after age 65. However, you can only do so if you start receiving your CPP retirement benefits. You must continue making CPP contributions if you continue working and haven't yet started CPP benefits.
Example - Three Choices at 65
Jane is 65 years old. She lives in Ontario and is an employee who earns $100k per year. She had a solid career straight out of university and has maxed her CPP contribution history. She is in good health and plans to continue working until 70.
Let's compare her three CPP options as she continues to work to age 70:
#1 - Start CPP and End Contributions
Now that she is 65, Jane could stop making CPP contributions if she starts her CPP retirement benefits.
Monthly CPP Starting at 65 = $1,364.60
CPP Contributions from 65-70 = $0
This option provides the most cash flow right now, but the least amount of guaranteed income in retirement.
#2 - Defer CPP to Age 70
Jane could instead continue to work and make CPP contributions. By waiting until 70 to collect her CPP, her pension will be larger:
Total CPP Contributions from 65-70 = $20,278
Monthly CPP Starting at 70 = $1,938
This option will give Jane the largest possible CPP pension.
#3 - Start CPP and Contribute to the PRB
Finally, she could opt to start her CPP now and continue to pay into the plan. Each year of work will create a small PRB, which builds up over the five years.
Monthly CPP Starting at 65 = $1,365
Total CPP Contributions from 65-70 = $20,278
Total CPP Benefit at 70 = $1624.65 ($1,365 plus $259.65 in total PRBs)
1st Year PRB - $44.46
2nd Year PRB - $48.19
3rd Year PRB - $51.93
4th Year PRB - $55.66
5th Year PRB - $59.40
Note: Since the PRB is calculated based on age as of Jan 1st of the following year, the amount of the PRB will vary based on her date of birth.
By starting her CPP at 65, she starts getting some money out of the plan and still has the option to get more pension income. Could this be a way for Jane to have her CPP cake and eat it too?
Deferral or PRB: 3 Factors to Consider
1. Health and Longevity Protection
Canada Pension Plan payments will pay you for as long as you live. This provides valuable protection against living longer than expected. Even if your savings run out, your CPP cheques will keep coming.
If Jane has a defined benefit pension through work, she may already have enough guaranteed lifetime income. If not, the increase in total CPP by deferring could give her more peace of mind in retirement.
2. Expected Future Earnings
The size of the annual PRB depends on earnings and contributions. If Jane retires early (by choice or necessity) or starts working part-time, her PRBs will be smaller than expected.
On the other hand, since she has already maximized her past CPP contributions, she can be sure of what her benefit will be if she defers to age 70.
She doesn't have to make this decision now if she isn't sure how long she'll continue to work. She could instead defer CPP for a couple more years before deciding to collect CPP retirement benefits and accumulate PRBs.
3. CPP Contribution History
The PRB is especially valuable for people who have already earned the maximum CPP benefit.
Jane got a good job right out of university and made maximum CPP contributions throughout her career. Unfortunately, this means that she won't get much benefit from her contributions from age 65-70 if she defers to 70.
Before the 2019 CPP enhancement, these contributions would have been completely wasted, but now she will at least get a small benefit from the enhanced contributions.
If, on the other hand, she had periods of low or no income, her contributions now while deferring could increase her base CPP, which would be further increased by the deferral.
Conclusion
Choosing when to start CPP benefits and whether to contribute to the Post-Retirement Benefit (PRB) can be a complex decision. It depends on several factors, including your health, expected future earnings, and past contribution history. The right choice is different for everyone, and the financial impact can be significant.
If you're unsure about the best option for your situation, consider speaking with a financial planner who can help you make an informed decision based on your unique circumstances.
