Doug Runchey, owner and operator of DR Pensions Consulting.Handout
Sign up for the Globe Advisor weekly newsletter for professional financial advisors on our sign-up page. Get exclusive investment industry news and insights, the week’s top headlines, and what you and your clients need to know. For more from Globe Advisor, visit our homepage.
This is the latest in an ongoing series, Planning for the CPP, in which Globe Advisor explores the decisions behind when to take CPP benefits and reviews different aspects of the beloved and often-debated government-sponsored pension plan.
What are the “combined benefit rules” under the Canada Pension Plan (CPP), and why do you need to worry about them?
The combined benefit rules are a complex set of calculations that apply if you’re receiving both a CPP retirement pension and a CPP survivor’s pension. Be aware of these rules if you’re already receiving the CPP survivor’s pension and want to know when you should start receiving your own CPP retirement pension.
Here are two quotes from the Service Canada website:
- “The most that can be paid to a person who is eligible for the retirement pension and the survivor’s pension is the maximum retirement pension (which is more than the maximum survivor’s pension),” and
- “The combined benefit is not necessarily the sum of the two separate benefits.”
I don’t think Service Canada is intentionally providing bad information on this subject, but these two statements are, at best, woefully inadequate. It gets even worse if you talk to a Service Canada representative about this issue on the phone or in person. You will likely be told something like: “You should take your own CPP whenever your retirement pension reaches an amount that – when added to your survivor’s pension – would equal the maximum because that’s the most you will receive anyway.”
That’s almost totally false and very bad advice if you follow it.
Let me provide you with the truths about combined benefits under the CPP:
- You can never receive the sum of the two separate benefits because the survivor’s pension is normally reduced by 40 per cent when combined with a CPP retirement pension, unless the CPP retirement pension is less than the CPP survivor’s pension. In that case, the survivor’s pension is reduced by 40 per cent of the retirement pension.
- If you start receiving your own CPP retirement pension before 65, the combined benefit will be recalculated (normally reduced by approximately $100 a month) when you reach 65. You can never receive the maximum amount from that point forward.
- If you’re already receiving a CPP survivor’s pension, you will normally be better off if you defer taking your own CPP retirement pension until age 70. The exceptions to this rule would be if you have a terminal illness and don’t expect to live past your mid-70s or if your CPP survivor’s pension is quite low.
- If you and/or your deceased spouse contributed to the “enhanced CPP” (after 2019), the enhanced portion of the retirement pension and the survivor’s pension are exempt from any combined benefit rules. Unfortunately, Service Canada doesn’t tell you what amount of any benefit is the base portion versus the enhanced portion, making it even more difficult to calculate combined benefits accurately since 2019.
- When calculating a combined benefit, the “maximum” is applied against the “calculated retirement pension” (before applying the age-adjustment factor if you take your CPP earlier or later than 65). That means taking your CPP earlier than 65 does not mean you can receive a higher survivor’s pension before you hit the max. Nor does it mean you will receive a lower survivor’s pension if you take your CPP later than 65.
If you’re receiving a CPP survivor’s pension and haven’t yet applied for your own CPP pension, you should ensure you understand fully what your choices are under the combined benefit calculation rules before you decide when to take your own CPP.
If you really press Service Canada, they will sometimes provide written estimates of your combined benefit if you took your own CPP at various ages, such as 60, 65 and 70. What I have never seen them provide, though, is what the recalculated amount would be from 65 forward if you took your own CPP earlier than 65. Without this little tidbit, it is like choosing between what’s behind door No. 1 or door No. 2. That might work on a game show, but it’s not the way anybody should make a lifelong pension decision.
Doug Runchey is the owner and operator of DR Pensions Consulting in the Comox Valley region of Vancouver Island. He welcomes Canadians with questions about any information presented in this article to send him an e-mail or to use his firm’s online CPP Calculator here.
For more from Globe Advisor, visit our homepage.