Old Age Security: Take it now or later?
February 6, 2014
By Sheryl Smolkin
When you are planning to fully or partially retire, there are many decisions to make. Most Canadians are aware that they can elect to start receiving their Canada Pension anytime between age 60 and 70.
But many do not know that as of July 2013 if they become eligible for OAS benefits at age 65 they can also choose to defer receiving benefits for up to five years.
Regardless of whether you choose to defer your OAS or not, you must apply for benefits from this program when you wish to begin receiving payments. It may make sense to wait, however, if at age 65 your income is still high enough that your benefits would be fully or partially clawed back. That would occur if you have net income between $71,592 and $115,716 on your tax return, and assuming you expect it to decline in future.
OAS is paid to seniors over 65 who are Canadian citizens or legal residents and have lived in Canada for at least 10 years after turning age 18. People living outside Canada at the time of application must have resided in Canada for at least 20 years after their 18th birthday. Your employment history is not a factor. A full OAS benefit is based on 40 years of Canadian residence.
For the period beginning January 2014, maximum OAS benefits are $551.54 per month or $6,618,48 per year. Benefits are indexed to inflation and adjusted quarterly. If you decide to delay collecting OAS beyond age 65, the benefit will be increased by 0.6 per cent for each month of delay to a maximum of 36%.
Therefore, based on the current annual benefit level (excluding future inflation), the pension you receive beginning at age 70 will be $9001.13.
Marissa Verskin, a senior tax manager at Toronto accounting firm Crowe Soberman, says the decision on whether to delay collecting OAS or claim it right away should depend on your personal situation. This includes your life expectancy, current and projected future income level and your expected rate of return.
Some of the other circumstances that may influence your decision are if you have chosen to work beyond age 65 or if you anticipate receiving a large one-time capital gain or lump sum at retirement (i.e., for accumulated sick leave credits or severance pay).
Doug Runchey of DR Pensions Consulting spent 32 years with Human Resources and Skills Development Canada. He says if you choose to defer receiving OAS beyond age 65 you can’t “double dip.”
That means if you are only eligible for a partial OAS pension because you have less than the 40 years of residence required for a full benefit, you can’t use the deferral period to both increase your OAS pension by counting it as additional years of residence and also receive a 0.6 per cent per month increase for voluntary deferral.
Service Canada is required to count the deferral period either as additional years of residence or a period of voluntary deferral — whichever is of the greatest benefit to the client.
Runchey also says there could be another collateral advantage to voluntary deferral of OAS. “If you delay and increase your OAS by 36 per cent to $9001.13 per year, you also effectively increase the maximum income claw back threshold to $131,599 from $115,716,” he says.
If you have started receiving your OAS benefits within the last six months but think you can benefit from the deferral, you can write to Service Canada and ask them to cancel your benefits for now. Once your request is approved, you will have to pay back the benefits received. Then you can reapply for OAS at a later date.
By 2023, gradual changes in the age of OAS eligibility from age 65 to age 67 will be fully phased in. This change will not affect OAS applicants or recipients born before March 31, 1958. But people born between April 1, 1958 and January 31, 1962 will have a date of eligibility between ages 65 and 67. For example, a person born in June or July 1961 will be not be eligible to collect OAS until age 66 plus eight months.
Also see:
Old Age Security
Changes to the Old Age Security program – Service Canada
Voluntary deferral of OAS – Retire Happy
Getting what’s yours when it comes to government pensions
Hi,
Just wondering if anybody knows how CPI increases are taken into account if you decide to defer the OAS. For example, if you defer for 5 years for a 36% increase, but during that period of 5 years, the CPI goes up by %16. Does that mean you only NET an additional %20 by waiting OR is the additional %36 get added to the inflation adjusted amount that you would have received by just taking it at 65 ?
Also, for those born after 1962 and you start collecting at age 67, would that amount be a 2 year deferred amount. For example (assume 2014 dollars in the year 2027) if you can collect $551.54 at 65 now and you deferred to 67, you would receive $630. Is the government starting you at $551 or $630.
Thanks
Hello Chris,
Thanks for your questions. If you have any others please let us know.
The response to your question comes from Doug Runchey at D.R. Pension Consulting. Doug has more than 30 years of experience working with the Canada Pension Plan (CPP) and Old Age Security (OAS) programs. He contributes to several Canadian financial forums and writes pension-related articles for the retirehappy.ca web site. The services he provides to individuals and his fees can be found on his website.
The increase of up to 36% for voluntary deferral would always be in addition to any cost-of-living increase as measured by the CPI. In this example, the net increase in OAS for the 5-year delay would therefore be 63.2% (136% of 120%).
For someone born in 1962 or later their earliest age of eligibility for OAS is 67. If they start receiving their OAS at age 67 they haven’t deferred anything voluntarily, so their OAS amount would be $551.54 (using the 2014 rates).
Thanks Doug.
Thats great news for the CPI adjustments PLUS the deferred increase.
Too bad about the new STARTING age of 67 for us younger crowd. I did not realize we are actually ripped off in two ways. 2 years of NO payments or no deferral increases for 2 years.
Thanks for a great post.
Chris D.