Delaying CPP payments can help ensure a secure retirement income

Financial advisors have a crucial role to play in helping their clients secure a more reliable retirement income, but many may be steering their clients in the wrong direction if they tell them to take their CPP/QPP payments early, a recent FP Canada Symposium was told.

Bonnie-Jeanne MacDonald, director of financial security research at the National Institute on Ageing (NIA), told the virtual conference that investors are told repeatedly that they need to save more for retirement. The big problem is that saving alone doesn’t provide secure lifelong income. But delaying CPP/QPP payments will.

“Retirees need to manage a pot of money that’s going to change in an unknown way to pay for unknown costs and this will be done over an unknown time horizon that can be well over 30 years. This is absolutely impossible,” MacDonald said.

“Delaying CPP/QPP is the most misunderstood, underused but often the most used accumulation system out there and only one per cent of Canadians use it [properly].”

In a new research paper, MacDonald said many Canadians are taking their CPP/QPP payments too early to make the most of them.

The federal government sets the year's maximum pensionable earnings (YMPE) figure, which determines the maximum amount on which to base contributions to CPP/QPP.

The size of the CPP benefits depends on an individual's earnings during their working years, how long the person has contributed to the CPP and when they start to receive the pension.

Currently, Canadians who have paid the maximum CPP contributions can start taking their CPP at age 60 and will receive about $1,000 a month. Wait until 70 and they will get more than $2,200 a month, she said.

Potential conflict of interest

Financial advisors, she said, need to change their outdated views on CPP/QPP because many of them are based on outdated assumptions. The unfortunate truth is that advice within the financial services industry is often influenced by a potential conflict of interest, she suggests.

“That’s because Canadians who take their CPP early will be less likely to touch their investments, and that will lead to higher trailing fees to pay to the professionals who are managing those investments.”

In the 1990s there was a lot of doubt as to how long the CPP system would be around, causing many people to take the CPP payments as soon as they could. But MacDonald said CPP is now considered to be one of the most sustainable public pension plans in the world.

Ageing population

She said the country is facing some major challenges to retirement financial security, particularly as the population ages. Some 62 per cent of Canadians are not in a workplace pension plan, we live in an era of historically low interest rates and jittery markets brought on by COVID-19 – all of which have come together to lower retirement income at the same time as the price of retirement is rising. The pandemic has also changed the minds of many seniors to age at home with a care worker rather than go into a long-term care facility. Staying at home might be more costly, which is why they might want to put off taking their CPP until 70.

“We need to remind the baby boomers who are retiring today that they are now making a financial decision that will affect them for the rest of their lives,” said MacDonald. “Using your savings as an investment to delay [taking] your CPP actually carries less risk and higher reward. It’s really a slam-dunk, great investment strategy as well.”

Vulnerable clients

The symposium also looked at vulnerable clients and financial abuse and the signs financial advisors need to spot to take their clients’ best interests to heart.

Bianca La Neve, partner, WeirFoulds LLP, Wills Trusts & Estates litigation said clients are entitled to make what advisors think are foolish decisions. But what’s really important to the advisor is whether the client has the capacity to understand and appreciate the information surrounding that decision.

“So you as a planner may present a strategy to your client for the investment of their property and you may propose that plan because you think it’s in the best interests of that client and will accomplish their stated goals. But the client is entitled to say ‘Thank you, but make another decision.’”

Red flags of financial abuse

Advisors looking for red flags of financial abuse for a vulnerable client include a change in redemption patterns that could be detrimental to the client’s financial goals, said Danielle Tetrault, vice president and Chief Compliance Officer with IG Wealth Management.

Tetrault said whenever an advisor feels a client is being taken advantage of financially they need to step back and request a temporary hold on transactions pending a decision by the advisor’s compliance or legal department.

About half of financial abuse cases come from family and friends and the other half from fraudsters taking advantage of the client, said Laura Tamblyn Watts, CEO of seniors advocacy organization CanAge.

There are also instances of emotional and psychological abuse, financial exploitation as well as physical abuse and neglect, she said.

Advisors and others can report these cases to the Canadian Network for the Prevention of Elder Abuse and check other reporting organizations in different provinces.

Internally, there are conduct protocols from self-regulators to follow to ensure advisors are taking the proper steps, said Tamblyn Watts.

“You don’t want to make things worse for the person,” she said. “There are real barriers to reporting abuse for people who may have restricted mobility or physical or cognitive limitations.”