WEALTH Matters — SUMMER 2009

Upcoming changes to Canada pension plan

Since its introduction in 1966, the Canada Pension Plan (CPP) has had a few changes to its rules. New proposals announced in June 2009 may have a significant impact on you if you are planning to retire within the next few years.

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upcoming changes to canada pension plan

how pension plans work

how safe is my pension?

investment fraud

One significant change to the CPP was increases to contribution rates from 1986 to 2003. The plan was considered to be underfunded, or heading that way. Predictions were that the number of retirees would soon exceed the number of contributors, and drain the plan’s reserve fund. Also, the average level of interest rates had declined significantly, cutting the plan’s investment return. To fix the imbalance, the annual contribution rates were doubled over this period of years.

The story is not so different today. People are living longer than they used to because of more effective medical treatments and healthier lifestyles, so they are drawing their pensions longer. This increases the financial burden on the plan. Interest rates are expected to stay relatively low compared with 20 years ago, so the plan is more dependent on new contributions than on investment income.

The planned changes this time cause a larger reduction in the annual pension income for people starting their pension before age 65, and a larger increase in income for people starting their CPP pension after age 65. Also under the new rules, you no longer need to stop working to take your CPP early, but you will have to keep contributing to the plan based on your earnings until age 65 (with some increase in your benefits). Finally your pension may be higher because the new benefit calculation ignores more ‘low income years’.

The table shows for each age, the benefit you can expect as a percentage of the benefit normally payable at age 65, and the rate of return you would need to earn on the income before age 65, in order to be able to match the total income you would have if you waited one more year before taking your pension.

Also in this issue of Wealth matters:

how pension plans work

how safe is my pension?

investment fraud

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What does this mean to you? If you are already drawing your CPP pension, or start drawing it before 2012, then there is no change for you compared with current rules. But if you plan to start your CPP pension in 2012 or later, the new rules could result in a higher or lower pension for you depending on your unqiue situation.

For example: if you have more than 7 years in which you contributed less than the maximum CPP contribution, then the new rules may result in an increased basic pension for you. If you are planning to start your CPP after age 65 then the new rules will give you more than the current ones, and if you plan to draw CPP before age 65 you will get less. If your planned start of CPP is close to December 2011, you may decide to start drawing CPP just before or just after the rule change date to get the best deal.

These calculations are complex, but the impact to you over a 20-30 year pension income period could be very large. We can help you get the complete information you need to make the decision that works best in your situation.

Please call us if you would like to discuss this further.

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