As the population ages and many Canadians choose to remain in the workforce past the traditional retirement age, understanding the implications of contributing to the Canada Pension Plan (CPP) becomes increasingly important. The decision to contribute to CPP after age 65 has benefits and drawbacks, which must be carefully considered to make an informed choice that aligns with individual financial goals and retirement plans.
Pros
- Increased Retirement Benefits: Each additional year of contributions can increase the amount you receive when you eventually start drawing your CPP benefits. This can be particularly beneficial if you contributed less in earlier years or started contributing later in your career.
- Post-Retirement Benefit (PRB): If you have already received CPP benefits and have chosen to continue working and contributing, you will earn additional benefits through the Post-Retirement Benefit (PRB). The PRB is a lifetime benefit that increases your overall CPP pension amount. It’s calculated separately and added to your existing CPP benefits, providing a financial boost without waiting to recalculate your entire pension.
- Flexibility and Financial Security: Continuing to contribute to CPP can provide a sense of financial security. It ensures that your pension income will be higher when you fully retire. This can be essential for those concerned about outliving their savings or facing unexpected expenses in their later years.
Cons
- Immediate Reduction in Take-Home Pay: Continued contributions mean a portion of your earnings will still go towards the CPP, reducing your immediate take-home pay. For some, especially those working part-time or in lower-paying jobs, this reduction can be significant and might affect their day-to-day financial comfort.
- Tax Considerations: While contributions to CPP are tax-deductible, the benefits you receive from CPP are taxable. Depending on your income level, this could push you into a higher tax bracket, potentially reducing the net benefit of higher CPP payouts.
- Diminishing Returns: If you already have a solid financial plan and sufficient retirement savings, the additional benefits from continued CPP contributions might not significantly impact your overall retirement income. In such cases, the effort and money put into continued contributions might not provide proportional benefits.
Contributing to the Canada Pension Plan after age 65 presents opportunities and challenges. The decision largely depends on individual financial circumstances and retirement goals. While additional contributions can increase retirement benefits and provide economic security, they also reduce current income and introduce potential tax complexities. Speak with your TMFG advisor if you find yourself in this situation.
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Carlo Cansino
Senior Financial Advisor
The opinions expressed are those of the author and not necessarily those of Assante Capital Management Ltd. This material is provided for general information and the opinions expressed and information provided herein are subject to change without notice. Every effort has been made to compile this material from reliable sources however no warranty can be made as to its accuracy or completeness. Before acting on the information presented, please seek professional financial advice based on your personal circumstances. Assante Capital Management Ltd. is a member of the Canadian Investor Protection Fund and the Canadian Investment Regulatory Organization.
