FP Answers: What happens if I die before – or just after – collecting my CPP?

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Retirement Personal Finance Family Finance

Despite concerns about premature death, most Canadians are living longer than they think

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Feb 22, 2022 • Feb 24, 2022 • 4 minute read • 6 Responses If you die before cashing in or shortly after starting CPP, the contributed money will remain part of the plan's total capital pool. If you die before cashing in or shortly after starting CPP, the contributed money will remain part of the plan’s total capital pool. Photo by Getty Images/iStockphoto Files

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By Julie Cazzin, with John DeGoey

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Q: What happens if I die before – or just after – I start collecting my Canada Pension Plan (CPP)? And how is it distributed among seniors? As a new senior I see so many irregularities in CPP distributions. The assumption that all boomers like me are rich is false. Many of us have no other retirement income. And I believe that especially single seniors do not receive money from CPP relative to what couples receive. Any transparency you can throw on this matter would be appreciated. † Maria

FP answers: Maria, you want to know more about how CPP is distributed among seniors, and in particular where the contributions go for those who die shortly after – or even before – collection. Such a delicate subject may strike many as fundamentally unfair. Why pay a whole adult life for something to get little or nothing on the way out?

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Before we get into those thorny areas, it should be noted that most Canadians leave money on the table precisely because they don’t want to feel the pain caused by these circumstances. Many Canadians take CPP at or before age 65, although most of them would be better off waiting as long as possible, ie until age 70.

Actuaries and aging experts almost unanimously agree that Canadians underestimate their own longevity risk. Purpose Investments Inc. has indeed recently released a new fund that has been developed and developed precisely because of this challenge.

Two caveats to use when discussing CPP are that everyone’s situation is different and no one knows when their time is up. As such, decisions should be tailored to your own circumstances.

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Yet the evidence is clear. Generally, most people are better off waiting as long as possible before claiming CPP. Research done for the FP Canada Research Foundation shows this emphatically. However, getting people to act in their best interests is a challenge when the prospect of supposedly free money looms before them.

The above points had to be clearly stated before you can answer your question because context is important. The premise of the question is fair, but it’s not as representative of the wider population.

Despite concerns about premature death, most Canadians are living longer than they think. As a monthly taxable benefit used to supplement retirement income, CPP is an essential part of their retirement plans. Recent changes allow the plan to eventually pay up to a third of your pre-retirement income. The previous target was a quarter.

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Still, the assumption that nearly all retired boomers are wealthy is indeed false. For 2019, the maximum monthly CPP amount you can receive as a new recipient at age 65 is $1,154.58. However, the average monthly amount is only $679.16. Your situation (contribution history) determines how much you receive.

If you die before cashing in or shortly after starting CPP, the contributed money will remain part of the plan’s total capital pool. If you have a surviving spouse, that person is entitled to a survivor benefit equal to 60 percent of your entitlement if he is 65 years of age or older. If they are younger than 65, they will receive a lump sum plus 37.5 percent of the old age pension of the contributor, provided that the surviving dependents do not receive any other CPP benefits.

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Many considerations affect the payments you can receive. For example, for people who have been single parents for a long time or who have made time to raise children, their payment will be adjusted.

But the main message is that Canadians really need to think about what their needs are likely to be in their fall years. All too often people take retirement money as soon as it is available to them, even though they would probably receive a lot more if they resisted the natural temptation and waited for there to be a real need for it.

All things considered, Canada’s public pension system is one of the best in the world. It is well managed and has been considered sustainable for generations. It will not run out of money and will not be adjusted for lower benefits. It is a careful, measured program that generally does a good job of preserving the dignity and minimal standard of living for ordinary Canadians.

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John De Goey is an IIROC licensed portfolio manager with Wellington-Altus Private Wealth (WAPW) in Toronto. This comment is the sole opinion of the author based on information obtained from sources believed to be reliable, does not necessarily represent the views of WAPW and is provided only as a general source of information. The accuracy of the opinions presented should not be relied upon and they do not constitute investment advice. For good investment advice, please contact your investment adviser. De Goey can be reached via john.degoey@wprivate.ca.

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