The early CPP penalty is how people refer to an up to 36% reduction to your CPP payments if you choose to start receiving them before you turn 65 years old. Your payments are reduced by 0.6% each month before your 65th birthday, which is a 7.2% reduction per year.
Despite the name, you’re not necessarily being reprimanded for choosing to receive early CPP payments. The earlier start date lengthens the timeline you’ll need to receive CPP for, which means they’ll reduce each payment so you can receive your total benefit for longer.
But deciding to take your CPP payments early is still a difficult decision. After all, this is taxable income we’re talking about, and you’ll never recover that up to 36% reduction in your later years when it’s even less likely that you’re able to work.
Here’s why you should avoid taking your CPP payments early.
Why you should avoid the early CPP penalty
There are 2 strong reasons to avoid starting CPP payments: you’ll get a lower monthly payment for life, and your payments are taxable so you risk paying extra income tax, especially if you’re still working.
Let’s take a look at each reason closely.
1. You’ll get lower CPP payments for life
Taking your CPP payments early means you’ll receive up to a 36% reduction on your monthly payment, with the upside being that you’ll get access to them earlier. This amount would remain the same throughout your lifetime, with small adjustments made for inflation and any additional contributions you make if you continue working to age 65.
Here’s how the timing of your payments affects how much you’ll receive:
| Age you begin CPP | Change per month | Change per year | Maximum change | Average monthly payment with maximum change |
|---|---|---|---|---|
| Before age 65 | -0.6% | -7.2% | -36% | $465.73 (age 60) |
| At age 65 | N/A | N/A | N/A | $727.61 (age 65) |
| After age 65 | +0.7% | +8.4% | +42% | $1,033.35 (age 70) |
Source: Canada’s How Much You Could Receive and When To Start Your Retirement Pension.
So while there are reasons to take early CPP, there are obvious disadvantages to it as well – namely, lower payments for the rest of your life.
This kind of thing may not seem like a big deal when you’re 60 (especially if you’re still working), but once you stop working and get to a point where you couldn’t work even if you wanted to, those lower payments coming every month will really start to hurt.
With life expectancy in Canada reaching 82 in 2020, maximizing the money you have in your later years is even more important than ever.
2. Your CPP payments are taxable
Since CPP payments are taxable income, you’ll have to pay income tax on what you receive and it may even put you into a higher tax bracket (again, if you’re still working).
Some people argue that you could take your CPP early and then invest the payments, but you’ll have to consider taxes and investment costs before deciding if your potential return is worth it. After all, you’re putting up potential return up against a guaranteed increase of 36%, which could be increased a further 42% if you wait until you’re 70.
How to apply for CPP at age 60
Although it’s clear that accepting CPP payments at age 60 will cost you money in the long run, many people simply need that income right away.
If this is your situation, here are the steps to take to apply for CPP at age 60.
- Visit the CPP retirement pension overview page on the Government of Canada website or a Service Canada Centre.
- Ensure that you qualify for CPP payments. To qualify, you must be at least 60 years old and have made at least one valid contribution to the Canada Pension Plan.
- Choose whether you want to apply online, in-person, or via mail. It will take 7 – 14 days to process an online application, and approximately 120 days to process hard-copy applications delivered to a Service Canada Centre in person or by mail.
- To use a paper application to apply, complete this form. Then, either mail it to the Canadian government, or drop it off at a Service Canada Centre.
- To apply online, get started here. You will need to log in to your Service Canada account. If you don’t have an account, you will need to register for one.
- Once you’ve applied, you can review your application status by checking your Service Canada account online.
Will you take early CPP payments?
Deciding whether to take early CPP payments is a personal choice. For some, the need for income right away is more important than any savings or benefit increases that will come from waiting.
If you can, wait until you’re 65 or 70 years old to receive payments. This will help you avoid the early CPP penalty and receive higher monthly payments down the road.
Ask yourself: Do you need the money now? Does it make sense to wait a few years?
Regardless of your decision, be sure you make this choice fully informed of the pros and cons of taking early CPP payments.
FAQ
What’s the penalty for taking CPP early?
When you take CPP payments before turning 65 years of age, your monthly payments will be up to 36% lower than if you wait until age 65. If you wait to age 70, your payments could be up to 42% higher than if you start receiving them when you’re 65 years old.
Should I take CPP at 60?
If you have a shorter life expectancy, you may consider taking CPP early. But if you can afford to wait a few more years, you should not take CPP at age 60 because it will result in lower payments for life. Rather, wait until age 65 or 70 so you can better supplement your retirement income with higher monthly payments.
What’s the average CPP payment at 60?
The average monthly CPP payment for someone who starts receiving payments at age 60 is $465.73.
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