If you freelance, your financial decisions may be a little different from those of people who cash a weekly paycheque. It shouldn’t be a surprise that your pension situation also proves unique, nor that you have lots of choices to make about when to start collecting your Canada Pension Plan (CPP) benefits. Should you defer benefits as long as possible, or should you take advantage of your benefits as soon as you can? As a freelancer, it’s wise to consider the pros and cons of each of these options.
Understanding Your CPP Benefits
Your CPP benefits depend on numerous factors, including your annual CCP contributions to the Canada Revenue Agency, your work history, and your age. Canadians usually begin taking their CPP at the age of 65, because if you start collection your CPP benefits the month after you turn 65, you get full benefits. That’s not your only option, though. You can also take benefits earlier with a penalty or later with an incentive. In fact, you can claim your benefits at any time after your 60th birthday.
Keep in mind that if you opt to collect your benefits before the age of 65, the CPP reduces your payments by 0.6% per month, or 7.2% per year. This means that taking your benefits five years early lowers your payments by 36% of what you get if you wait until age 65. Alternatively, if you delay your payments, they increase by 0.7% for every month, or 8.4% for every year you wait. If you wait until age 70, your benefits sit 42% higher than what you get if you start collecting CPP benefits at age 65.
Reasons for Delaying CPP Benefits Collection
The basic math shows clear benefits for delaying your CPP payments. As of 2018, if you take your payments at 65, you can receive a maximum of $13,610.04 per year. But if you delay your payments until age 70, your maximum benefits increase to $19,326.26 per year. In contrast, if you take those benefits at 60, the maximum amount you can collect works out to just under $9,000 per year. Keep in mind that you start collecting your Old Age Security (OAS) program funds at 65, so if what you receive from that program fulfills your needs, it probably makes sense to wait and collect the higher CPP payment amount.
Reasons for Collecting Your CPP Benefits Early
Although the math clearly shows the advantages of delaying your CPP benefits, some compelling reasons exist to take early payments. As a freelancer, you have to continue contributing to your CPP until you reach age 65, but even if you still work, you can start collecting your benefits at age 60. If you want to cut back on your hours and need some supplemental income, consider early benefits collection as an option. Also, some people opt to take early benefits because they prefer to have the funds in their hands rather than having them held by the government.
Some Canadians collect early because they feel they can make up the difference by investing the funds now. If you’re thinking about taking early CPP payments and investing them, ensure the return on the investment exceeds the incentives the CRA offers for delaying your payments. For instance, if you’re deciding between taking benefits at age 65 versus age 70, you need an investment that reaps at least 8.4% annual growth plus inflation. Still other freelancers take early benefits because they want to enjoy the fruits of their labors now as opposed to later.
While both sides of the CPP collection debate have their clear advantages, a talk with a financial advisor or accountant who understands your particular situation proves helpful. These professionals can help you crunch the numbers on various retirement options so you can make the right decision for your needs. While you plan for retirement, consider some tools to help your business thrive. QuickBooks Self-Employed accounting app helps freelancers, contractors, and sole proprietors track and manage business on the go. Download the app.