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What is a pension bridge benefit? Thumbnail

What is a pension bridge benefit?

Retirement Funding

Not everyone retires at 65. If you have a well-paying career and good savings habits, you may have the chance to retire early.

For those with Defined Benefits (DB) pension plans, leaving the workforce early, even before your Canadian Pension Plan (CPP) or Old Age Security (OAS) kicks in, will often trigger a bridge benefit.

As this can bring up new options for you in your retirement, it’s wise to understand this benefit before you decide to retire early. 

We’ll cover what a bridge benefit is, how it may affect your retirement income, and the choices you may (or may not) have regarding it.

What is a pension bridge benefit?

A bridge benefit is a temporary monthly top-up on your DB pension cheques to supplement your income until you start receiving CPP at age 65. 

Essentially, the top-up mimics your CPP payments, giving you the same monthly retirement income before you decide to take CPP as after. 

However, that extra income often comes at a price. Taking your bridge benefit often results in lower payments later on in your retirement years. 

How does it work?

Depending on your pension, your bridge benefit may be optional or mandatory. 

If you have the option, deciding whether or not to take your bridge benefit is the most challenging part. 

However, after you’ve made your decision, the rest is relatively simple. 

If you choose (or are required) to take your bridge benefit, they will simply come as an increase in your benefits cheque. This bump in income will last until you turn 65, regardless of whether or not you choose to take your CPP early or your OAS late.

Should I take my pension bridge benefit?

If you have a choice, deciding whether or not to take your bridge benefit can be confusing. 

You’ll need to weigh the benefits of getting more money early in your retirement with the cons of losing out on money later on. 

There are good reasons on both sides of the argument, so the final answer comes down to what works best for you.

To help you understand your choices, let’s cover some of the reasons you may choose not to take your bridge benefit, and reasons why you may choose to take it.

Reasons not to take your bridge benefit

Often when we look at good money practices, playing the long game is more advantageous, and that may be the case here, too. By opting not to take the bridge benefit, and increasing your payments later on, you can:

  • Optimize the amount you receive from your DB pension plan over the course of your life.
  • Avoid stepping into a higher tax bracket if you plan to work a post-retirement job.

Reasons to take your bridge benefit

There’s an old saying that goes, ‘a bird in the hand is worth three in the bush’. Sometimes, that’s true for savings. Having that extra bit of money from your bridge benefit today may grant you the freedom to make the most of your finances tomorrow.

Taking the benefit now means you:

  • Won’t need to draw down your savings as much early on in your retirement.
  • Can use that extra money to maximize your tax-free savings account (TFSA) or other high-performing assets.
  • Can pay down debt that is eating away at your wealth faster than it is growing.

Bridge benefit and your spouse

When you’re deciding whether or not to take your bridge benefit, you also need to take into account your partner (if you have one). 

Often, DB pension plans have survivor benefits. That means that even if you choose not to take your bridge benefit, and don’t live long enough to maximize your benefits, your spouse will still receive your pension for their lifetime.

Get personalized advice about your pension bridge benefit

When it comes to planning your retirement, the financial side can get tricky. The real answer to most of your questions about retirement, such as whether or not you should take your bridge benefit, is dependent on you. 

For some, taking a bridge benefit up front and dealing with the decrease in benefits at 65 makes the most sense. For others, choosing not to take the benefit is the best path forward. 

The best way to plan your retirement is to see a financial planner at Bayview Financial. Together, we will paint a holistic picture of your retirement, so you can make the best choice for you.