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Survivor benefits for CPP poorly understood

When it comes to the Canada Pension Plan, how much do you really expect to get?

Right now, the maximum annual CPP pension available is $12,456 or about $1,038 a month, all of which is indexed to inflation. And while the average monthly payment in early 2014 was only $633 a month, that number is going to climb sharply in the coming years.

In fact, if both you and your partner have had decent jobs over your lifetime, you could each qualify for something close to that maximum pension at age 65.

But that combined number would change sharply once one of you dies, says Doug Runchey, a B.C. pension consultant with three decades of experience working with the federal government's Income Security Programs.

Survivor pensions capped
Even if both partners (including those in same-sex relationships) have contributed all their lives, the sum of the deceased person's pension and the survivor's pension can't be more than the maximum allowed, which, remember, is $1,038 a month.

Doesn't seem quite right, does it? There is a beneficiary for the balance, of course, but it's actually not the government -- it's really the rest of us.

The modern-day CPP works on the principle of pooled risk, similar to an annuity. This means your pension cheque is made up of several things: the money you and your employer contributed, the investment earnings on that money, payroll contributions from current workers, and some other people's money.

That's right, since survivors are subsidized by those who weren't as fortunate, your contributions towards a future CPP pension essentially represent a wager that you'll outlive the average Canadian and a willingness to forgo your claim if you don't.

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It's all about longevity
It's a balancing act. If you live a long time, you'll get far more out of the CPP than you ever put in. Losing that longevity race, however, could see a significant portion of your hard-earned savings go to the winners -- in this case, other CPP recipients, instead of your heirs.

Here's the worst case scenario: If you die before you hit 60, and don't have a surviving spouse, and your children are all over 25, your estate will get a one-time death benefit of $2,500 to help with your funeral. Everything else you contributed over the years will go towards other people's pensions.

Since contributions are mandatory while you're working, there's not much you can do about this. But, if two of you have been contributing the maximum over the years, it could influence when you actually start taking your pension.

Starting at 60 no solution
By starting early, the thinking goes, you'll have some pension money in hand and your two combined pensions will be less likely to butt up against that limiting threshold in the future. But that's not the case, Runchey says.

The combined value of a retirement and survivor pension is based on the maximum the survivor would have received when starting CPP. That amount, plus indexing for inflation, is their maximum.

"Since it's their calculated retirement pension amount that's used when calculating the combined maximum -- which is not the same as their actual retirement pension amount -- they won't be further ahead by starting early," he says.

In fact, if you're in good health and expect to live longer as a result, you'll most likely receive more income over your lifetime by waiting to take your CPP.

But that might not be true for both of you.

Gordon Powers heads up the Affinity Group, a consulting firm focusing on retirement readiness

-- Posted May 12, 2014
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