Does it pay to delay your pension benefits?

Fortunately, with certain exceptions, you won't usually go far wrong with either approach. That's because the government's adjustment factors for starting these benefits early or later are designed to be roughly equivalent financially for people with average life expectancy. (Technically, they are intended to be "actuarially neutral".)

"There's no compelling advantage or disadvantage for most people either way," says Malcolm Hamilton, a retired actuary and current fellow at the C.D. Howe Institute. "So you shouldn't over-complicate the decision or lose sleep over it."

Nonetheless, it pays to understand the different factors that can affect this decision, so you can make the decision that best fits your preferences and circumstances. A number of usually modest factors might nudge your decision in one way or the other. (Benefits for CPP and QPP are very similar, but some details are different.)

Reasons for starting pensions early

1. Your health is poor
If you're in poor health and are anticipating significantly shorter-than-average life expectancy, it makes sense generally to take a reduced rate and start your pensions as early as you can. That should allow you to maximize how much pension income you draw over your remaining lifetime.

However, if you're younger than 65 and have a "severe and prolonged" disability and are eligible for CPP or QPP disability benefits, consider taking the disability pension immediately while waiting to start the regular retirement pension at 65. Under CPP, you're always better off doing it that way, says Doug Runchey, an OAS and CPP calculations expert at DRpensions.ca. You can't take both the CPP regular and disability pension at the same time, and the disability pension is always larger than the regular pension taken early, he says. Then at age 65 the disability pension converts automatically to an unreduced regular CPP pension.

2. You need the income
If you have little in the way of other sources of income, it makes sense to want to start government pensions as soon as you are retired and eligible.

However, the optimal timing of CPP/QPP can get complicated if your income is low enough that you're potentially eligible for the seniors' low-income Guaranteed Income Supplement (GIS) at age 65. If you need money to live on and almost all of your potential sources of cash flow (including CPP/QPP benefits and RRSP/RRIF withdrawals) are subject to GIS clawbacks, then there is no general reason not to start CPP/QPP as soon as you retire. In fact, there can be an incentive to start CPP/QPP in your early 60s. This would enable you to initially receive payouts without having to worry about clawbacks. Then, after 65, the reduced pension would result in lower GIS clawbacks than had you opted for an unreduced pension. But if you have significant sources of savings that you can draw on that don't affect your GIS entitlement (such as tax-free savings accounts), then the best time to start your CPP/QPP benefits will depend on your specific situation.

3. You've spent lots of time out of the workforce
If years ago you spent many years out of the labour force and now you have stopped working in your early 60s, there is a complicated technical reason that might give you a modest incentive to start CPP/QPP early.

This technicality is due to the way CPP/QPP is calculated. Your CPP/QPP entitlement depends on averaging your contributions and earnings in relation to the maximum each year from age 18 until you start taking CPP/QPP. With CPP, you're allowed to drop 17% of your lowest-earning years from the calculation, which amounts to eight years if you retire at 65. (With QPP, the general drop-out factor is 15%.) Under both programs, you can drop out additional low-income years due to severe disability or due to raising children under the age of seven. Under CPP, additional low-income years after 65 won’t count against you in the calculation.)

As it turns out, it's easy to use up all your general drop-out years if you spent many years getting an education or pursuing other unsalaried activities. If you then stop working in your early 60s and don't start CPP/QPP right away, you'll add more years of zero income and zero contributions to the calculation. In those situations, the impact in isolation is to reduce your CPP entitlement by about 2.5% for each year of deferral up until age 65, says Runchey. Under CPP, you still get the general deferral factor of 7.2% a year for waiting to start your benefits, but the impact of adding more zero-income years to the calculation costs you about 2.5% a year, for a net impact of about 4.7%, says Runchey. "You'll get a larger slice of a smaller pie, although over-all you'll still get more pie."

Reasons for starting pensions later

1. You have above-average life expectancy
If you live an exceptionally long life, then you'll collect much more money by delaying government benefits for as long as possible. Of course, it's difficult to tell in your 60s if that's going to be the case. But your chances of doing so improve if you reached your early 60s in good health and generally have a pattern of other favourable indicators such as: you don't smoke, you're not overweight, you exercise regularly, you eat healthily and your forebears mostly lived into their 90s.

2. You can squeeze a bit of extra juice from CPP/QPP deferral
A couple of other features can give you a small added boost to deferring CPP and QPP (but don't apply to OAS). Firstly, your CPP/QPP entitlement is indexed to average wage increases before you start the benefit, and then your benefits are indexed to consumer prices once you start payouts. Since in recent years average wages have grown roughly one percentage point faster on average than consumer prices, chances are the core value of your entitlement will grow a little faster by deferring it rather than by starting it. Secondly, the deferral adjustment factor from age 65 to 70 for CPP/QPP is one percentage point per year higher than for OAS. (The two programs don't apply precisely the same assumptions to the concept of "actuarial neutrality.") So if you're only going to defer one pension past age 65, better to delay CPP/QPP than OAS.

3. Deferral rates look particularly attractive today
While the factors you get for deferring CPP/QPP and OAS are intended by the government to be roughly "actuarially neutral," the numbers look pretty appealing in light of today's challenging investment prospects.

When you start your pensions immediately, you free up money in your nest egg to invest for later, so you're more dependent on how much you garner from your investments. So you're implicitly comparing the rate of return you can earn on your own investments versus the rate built into the government's deferral calculations. Fred Vettese, chief actuary at pension consultants Morneau Shepell and author of The Essential Retirement Guide, says the CPP deferral rates incorporate the assumption of about a 6% "nominal" return, or a 4% "real" return after adjusting for inflation. While you might hope to earn a similar return in your own portfolio, the point to understand is that these pension returns are essentially guaranteed by the government through the deferral factors, whereas to match those rates on your own will require you to take significant investment risk. That's particularly the case these days with low interest rates, which can cause seniors to add more equity to their portfolios than they might have when investment-grade bond yields were more attractive.

In addition, the deferred CPP and OAS pensions are indexed to protect you from inflation and guaranteed for life, while the returns generated by your investments come with no such assurance. That's a great feature if you're at all concerned about outliving your wealth.

"Risk-adjusted, it's a very good deal," says Vettese. "What people are doing by deferring their pensions is transferring some of the investment risk and longevity risk back to the government."

	Government pensions: The basics
		CPP/QPP	OAS
	Age to start	60 to 70	65 to 70
	Sources of funds	Equal employee and employer contributions	General government revenues
	Maximum benefits*	$13,370 annually	$6,942 annually
	Reduction before age 65	0.6% per month (CPP); 0.5-0.6% per month (QPP)	N/A
	Enhancement after age 65	0.7% per month	0.6% per month
	Indexing method	To average wage levels before starting; to CPI afterward	To consumer prices
	*As of Jan. 1, 2017 Sources: CPP, QPP, Government of Canada