One of the most common questions clients ask their financial advisors is when they should start collecting their Canada Pension Plan (CPP) and Old Age Security (OAS). We will review answers to some of the common questions related to deferring OAS here.
What is the maximum OAS pension amount?
An individual who commences payments at age 65 and meets the residency requirements for a full OAS pension is entitled to $615.37 as of January 2021. Benefits are adjusted quarterly and indexed to the Canadian Consumer Price Index (CPI).
When can I start receiving OAS?
Your OAS pension can start as early as the month following your 65th birthday. You can choose to defer collecting your OAS pension to age 70. Each month you defer increases the benefit by 0.6%.
For instance, if you defer collecting OAS to age 70, your benefit amount will increase by 36% over the age 65 amount.
How is OAS income taxed?
OAS benefits are considered taxable income. If you receive an OAS pension, you will receive a T4(OAS) slip from Employment and Social Development Canada.
- Benefits cannot be split with a spouse on your tax return.
- Benefits are not eligible for the pension income amount tax credit.
- Most importantly, OAS benefits are subject to a pension recovery tax.
- Your OAS pension is reduced once your income exceeds $79,845 (2021). The reduction is calculated at a rate of 15 cents for every dollar in excess of the threshold. OAS benefits are fully clawed back once your income exceeds $129,075 (2021).
- For example, if a 65 year old applicant for OAS in 2021 has income of $90,000, a clawback of 15% of the difference between $90,000 and the threshold limit of $79,845 would apply, ($90,000-$79,845) x 15% = $1,523.25 annual clawback. If we assume this applicant was otherwise eligible for the maximum OAS of $7,384.44/year, then their net benefit would be reduced by $1,523.25 to $5,861.19/year.
When should I start collecting OAS?
The answer to this question is highly dependent on your personal situation and may depend on your current and future anticipated income. You are recommended to work with your advisors to determine if deferral is suitable for your life and financial goals.
Here are some examples of situations when you may wish to defer collecting benefits:
- You are still working at age 65 and are expected to earn more than the minimum income recovery threshold. A deferral may make sense if your OAS benefits are expected to be partially or fully clawed back due to earned income and you anticipate a reduction in total income in the future.
- You anticipate a high level of income around age 65 due to the planned sale of an asset, property, or business. A deferral may make sense if the taxable proceeds are expected to exceed the income recovery threshold.
Here are some examples of situations when you may not wish to defer:
- Your life expectancy is poor. Unlike CPP, there are no survivor benefits for OAS.
- You expect high levels of income after age 70.
- For example, an individual with significant RRSP balances may not want to defer. RRSPs must be converted to RRIFs by the end of December of the year you turn 71 and minimum payments commence at age 72. If the anticipated annual RRIF income plus other income, such as CPP or investment income, is expected to exceed the threshold, a deferral might not make sense.
- Married couples or those in a common-law relationship may wish to consider available income splitting options to reduce OAS clawbacks and maximize after-tax retirement income.
How do I defer collecting my OAS?
If you received an automatic enrollment letter, then you have two options to elect deferral; online by accessing your My Service Canada account, or via a letter mailed to Service Canada.
If you are already receiving OAS benefits; you can cancel them only if you have been receiving benefits for less than 6 months. You will be required to repay any benefits received up to the cancellation.
What if my situation changes after I have chosen to defer collecting OAS benefits?
If you deferred collecting your OAS and later decide that you should have started it earlier; you can request retroactive payments for a maximum of 11 months, or back to the month following your 65th birthday, whichever period is shortest.
What happens to my OAS on death?
OAS does not have a survivor benefit. OAS benefits must be cancelled at the time of death. There is an allowance for surviving spouses or common-law partners, between ages 60-64 only that have income under $25,152 (2021).
There are multiple factors you will need to weigh in deciding when to commence payments from OAS. An ATB Wealth advisor can help you create a personal retirement plan that illustrates the impact of these benefits on your retirement finances. Contact us today to speak with one of our experts.
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