CPP Disability Pension: When to Retire and Start Benefits

What happens to disability benefits when you retire?

Wilma, I’ll address two main questions: will your Canada Pension Plan disability income (CPP DI) continue if you retire and begin your workplace pension, and is it better for you to start the pension now given that your workplace disability income would stop?

1. Will your Canada Pension Plan disability benefit continue once you retire and start your pension?
2. Should you start your pension now, knowing your workplace disability income will end?

Do you lose disability when you retire?

First, the CPP disability question. To qualify for CPP DI and to keep receiving it, your disability must regularly prevent you from performing any substantially gainful work. “Substantially gainful work” is assessed by the amount of earned income you receive. In practical terms, if you earn more than $18,503 (the maximum CPP DI threshold for 2023), your CPP DI is likely to be terminated.

There is a middle range—about $6,600 to $18,503—where CPP DI may be reduced or removed. In that zone the effect is assessed on a case-by-case basis, so outcomes vary.

Importantly for you, CPP looks at earned income—money received from working—rather than passive income when deciding eligibility. Passive income generally does not affect CPP DI. Examples of passive income include company pension payments, withdrawals from a registered retirement savings plan (RRSP) or registered retirement income fund (RRIF), rental income, and similar sources. With a few exceptions, these passive income streams will not count against your CPP DI eligibility.

So the short answer: starting your workplace pension now should not automatically cancel your CPP disability benefit. Your CPP DI should continue after you retire, provided your disability still prevents you from substantially gainful work and your earned income remains within CPP limits.

When on disability, should you retire early?

Whether you should begin your pension now is a financial and personal decision that depends on numbers, lifestyle preferences, tax consequences, and benefits such as group health coverage.

If you retire now and begin your pension, your pension income would replace your $16,000 annual workplace disability benefit with $29,905 a year for the next four years (until age 65). That’s an extra $13,905 each year, or about $55,620 over those four years.

However, from age 65 onward your pension would be $20,034 a year if you start it now, compared with $23,034 a year if you delay starting the pension until age 65. That’s $3,000 less per year after age 65. Dividing the $55,620 you’d receive early by the $3,000 annual shortfall gives roughly 18.5 years to break even. In other words, the pension starting at age 65 is the better financial choice if you expect to live past about age 79. If you pass away before that break-even age, beginning the pension now delivers more lifetime income.

Several factors can shift that break-even point. If you save and invest the extra $55,620 you receive by starting early, the break-even age moves further out because the invested funds may grow. Conversely, if you spend the extra amount, the break-even point stays closer to the age above. Other considerations—like changes in health, life expectancy, inflation, and the returns you would realistically earn on any savings—also matter.

Beyond pure math, ask yourself whether you prefer extra income now to cover living expenses or improve quality of life, or whether you’d rather give that up for a modest permanent increase later. After 65 you’ll also have CPP retirement benefits, Old Age Security (OAS), and possibly your partner’s income, so you may not need the extra $3,000 each year. Some research suggests couples often reduce spending gradually after 65, which could reduce the importance of that $3,000.

Income splitting and taxes for retirement planning

Also consider taxes and pension income splitting with your partner. If one spouse has a higher income, splitting pension income can lower the couple’s overall tax burden. Whether this is relevant depends on the difference in your and your partner’s incomes and on your marginal tax rates; the timing of your pension start could affect these opportunities, so check with your financial or tax advisor.

Group health benefits are another practical consideration. If your employer stops covering health benefits when you retire, you may need to pay for equivalent coverage out-of-pocket. Those premiums would reduce the effective gain from starting the pension early and could bring the break-even point closer.

In short: starting your pension now will likely not end your CPP disability benefit, but it will stop your workplace disability payments and change your long-term income profile. If you value extra income today and aren’t worried about outliving the break-even age, starting now may make sense. If you prefer to maximize lifetime pension income and expect to live longer than about age 79, delaying until 65 is the stronger mathematical option. Discuss these trade-offs with a financial or tax advisor who knows your full situation before deciding.

More about insurance:

• 8 critical illness insurance myths
• 7 disability insurance myths to stop believing
• What you need to know about disability insurance
• What is short-term disability insurance?