Navigating the complexities of retirement planning can be daunting, especially when it comes to understanding when and how to take Old Age Security (OAS) benefits. OAS is a crucial part of Canada's retirement income system, designed to provide financial support to seniors.This guide will help you determine the optimal time to start receiving OAS payments, explain the eligibility criteria, and walk you through the application process

 

 

 

 

 

Frequently Asked Old Age Security (OAS) Questions

• What is OAS?
   

  Old Age Security (OAS) is a government-funded pension program in Canada designed to provide a steady income stream to seniors aged 65 and older.

• How do I qualify for OAS? How much will I receive?
   

  Qualifying for OAS is pretty straightforward. You need to be 65 or older and must have lived in Canada for at least 10 years after turning 18. For the full pension ($718.33 at age 65 as of July 2024 ), you need 40 years of residency. There is a pro-rated amount if you spent less than 40 years of residency (i.e. 20 years of residency would grant you 50% of the max pension).

• How do I apply for OAS?
   

  You should apply for OAS six months before you want to receive payments. This gives enough time for processing so you can start receiving benefits at the time you wish. Don't miss out—apply early to ensure a smooth transition into your retirement income.

• Should I take OAS at age 65 or delay?
   

  Taking OAS at 65 gives you immediate income, which is great if you need it now. But if you can wait, deferring OAS until age 70 increases your payments by up to 36%. It’s a fantastic option if you want higher monthly income later. Speak to a Certified Financial Planner® to discuss options for this important decision.

• How is OAS taxed?
   

  The OAS pension benefits are considered taxable income. Depending on your total taxable income, you might owe taxes on your OAS pension payments. To minimize taxes, you can use strategies like pension income splitting or deferring OAS. It’s crucial to understand your tax situation and plan accordingly.

 

 

What is OAS (Old Age Security)?

OAS is a government-funded pension program that provides monthly benefits for eligible seniors aged 65 and older. This program, unlike CPP, is solely funded by the government and eligibility is based on age, legal status, and residency requirements. In 2022, the cost of OAS represented 5.8% of the federal government’s budget, or $68.3 billion. This program serves as a testament to Canada’s commitment to caring for its seniors, ensuring they can age with dignity and enjoy their later years with financial comfort.

How much Old Age Security will you receive?

To be eligible for an OAS payment, you must be at least age 65. In addition, your benefits depend on where you live.

• If you live in Canada, you must be a Canadian citizen or resident and must have lived in Canada for at least 10 years since you turned age 18.
• If you live outside Canada, you must be a Canadian citizen or resident when you leave the country. You also must have lived in Canada for at least 20 years from age 18.

The current maximum OAS benefit at age 65 is $718.33 per month, with it receiving quarterly inflation increases1 and a 10% increase when you reach age 75. If you would like to estimate what your OAS benefits would be, the CRA has created an OAS benefits estimator for your convenience: https://estimateursv-oasestimator.service.canada.ca/en

 

How to apply for Old Age Security

In 2013, the government introduced automatic enrollment for OAS to ensure that eligible seniors receive their benefits without needing to apply. The month after you turn 64, many seniors will receive a notice by mail that will outline your application process and whether you would like to defer OAS. This is a crucial decision as we will discuss later.

If, for any reason, you did not receive a notice you should contact Service Canada at https://www.canada.ca/en/employment-social-development/corporate/contact/oas.html

For more information on the application process, visit this Canada.ca page. https://www.canada.ca/en/services/benefits/publicpensions/cpp/old-age-security/apply.html

 

Old Age Security Clawback

The OAS clawback is a mechanism that reduces or eliminates OAS benefits for higher-income seniors. This adjustment kicks in when an individual's net income exceeds a specified threshold, which is set annually. As your income surpasses this threshold, OAS benefits are gradually clawed back at a rate of 15 cents for every dollar of income above the threshold, until the benefits are completely phased out. It's a way to maintain the sustainability of the OAS program while adjusting benefits based on income levels, promoting a balanced approach to retirement income support.

As of 2024, the minimum recovery period starts at the income level of $90,997. If you make less than $90,997, you will receive full Old Age Security benefits.

 

Should you defer OAS?

Here are three reasons why you should defer OAS:

1. Enhanced pension benefit

   Canadians often take OAS immediately at age 65, and until 2013 you weren’t able to defer OAS. Deferring your Old Age Security (OAS) to age 70 is a power move if you’re looking for a significantly boosted monthly benefit. By waiting those extra five years, your OAS payments increase by a whopping 36%, plus cost-of-living increases. This means more money in your pocket every single month, giving you greater financial security and flexibility in your later years. Imagine having that extra cash to cover rising healthcare costs, enjoy more travel, or simply maintain a higher standard of living without worrying about your finances. It’s about making a smart, strategic choice today to ensure a richer, more comfortable tomorrow.
    

2. Longevity

   Opting to take OAS benefits later can be a strategic decision, particularly for those concerned about their retirement longevity and ensuring financial security in their later years. The thought behind this is you will be withdrawing from your personal savings (RRSP, LIRA, TFSA, etc.) in the early years of retirement to collect OAS at a larger monthly benefit in the future. This strategy is to be used with your overall financial plan and you should have a clear picture of your future retirement income structure and its sustainability. This would allow your guaranteed government pensions to defer and may ultimately provide your family with a larger retirement income and estate value. Each person's situation is unique, please discuss this with a licensed Certified Financial Planner® professional before taking action.
   
   When looking at when to take OAS, you should also consider your lifespan. As shown below, you have a breakeven point on when taking OAS makes sense. Mathematically, if you were to delay OAS until age 70, you would need to live until approximately age 81 for the deferment to benefit you. No one knows how long we’re going to live, but we can make an assumption based on health, genetics, and family history.
   
   We run cost-benefit calculations for our clients and take into account all considerations when deferring or taking OAS. If you are faced with this decision, please book a complimentary initial consultation with one of our Certified Financial Planner® professionals.

   	Age 65	Age 66	Age 67	Age 68	Age 69	Age 70
   Max monthly benefit	718.33	770.05	821.77	873.49	925.21	976.93

   
    

3. Reduce your OAS clawback

   By waiting extra years, you increase your total income from other sources, such as pensions, investments, or employment income. This approach can lower your taxable income in those earlier years, potentially keeping you below the income thresholds where the OAS clawback kicks in. By the time you start receiving your boosted OAS benefits at 70, you might find yourself in a more favourable tax bracket, maximizing the amount you keep in your pocket while still enjoying enhanced monthly payments. It’s all about timing and smart financial planning to minimize taxes and maximize your retirement income for a more secure future.
    

Should you take OAS at age 65?

Here are three reasons why you should collect OAS at age 65:

1. Leaving more to your estate

   First, you begin receiving a steady income stream immediately. This isn't just a small benefit; it’s money in your pocket right away, reducing the need to dip into your other retirement assets. Imagine preserving your RRSPs, TFSAs, and non-registered accounts for longer. These investments can continue to grow, thanks to the magic of compound interest, potentially ballooning into a much larger sum over time. Moreover, by getting OAS at 65, you effectively manage your cash flow in those crucial early retirement years. This means you won’t have to sell off other investments, allowing them to stay invested and grow. And if those investments have a higher growth potential than the increase you'd get from deferring OAS, you're setting yourself up for a bigger payoff in the long run. In essence, taking OAS at 65 can be a savvy move. It keeps more of your money working for you, growing your nest egg, and ultimately leaving a more significant legacy for your loved ones. It’s about maximizing your assets today to ensure a more prosperous tomorrow for your heirs.
    

2. You need the money now

   Why wait to enjoy your golden years when you can start receiving a steady income stream immediately? This immediate influx of cash can be used to cover daily expenses, travel, pursue hobbies, or simply improve your quality of life. You’ve worked hard all your life, so why not start enjoying the fruits of your labour as soon as possible? This extra income can also reduce the need to tap into other retirement savings early, preserving your nest egg for future needs. Additionally, by taking OAS at 65, you gain financial flexibility and peace of mind. This immediate cash flow can help you manage your budget more effectively and avoid the stress of waiting for higher payments down the line. If unexpected expenses arise, such as medical bills or home repairs, having this additional income can be a lifesaver. Plus, with the cost of living constantly rising, having more money now means you can maintain your current standard of living without compromising. In short, starting OAS at 65 empowers you to enjoy a comfortable and secure retirement right from the start.
    

3. Longevity

   Taking OAS at 65 can provide peace of mind regarding your health. If you have health concerns, having a guaranteed income can alleviate some of the financial stress that often accompanies medical expenses. It allows you to access funds for immediate healthcare needs without having to dip into your other retirement accounts, preserving them for the future. This approach not only helps manage your financial security but also supports your overall well-being, ensuring you have the resources needed to maintain your quality of life as you age. By taking OAS at 65, you create a safety net that helps protect against the uncertainties of longevity, making it a wise choice for those with long-term financial and health concerns.

So, should you defer or collect OAS at age 65?

It’s all about finding the right balance that fits your unique situation. Everyone’s finances, lifespan, and goals are different. To ensure you make a decision that’s right for you, we highly recommend you speak to a licensed financial planner who is legally obligated to act in your best interest. A second opinion before you collect OAS can ensure you make the right decision moving forward.

 

Old Age Security Example Scenario: John and Susan

Background information

• John (age: 65) and Susan (age: 64) are in good health with a family history of longevity.
• Current Retirement Savings: $500,000 in RRSPs, $200,000 in a Tax-Free Savings Account (TFSA), and $300,000 in a non-registered investment account.
• Annual Retirement Income: $40,000 from a defined benefit pension plan (John's) and $15,000 from part-time work (Susan).
• Annual Expenses: $55,000.
• CPP Benefits: John and Susan both plan to start receiving CPP at 65, with John expected to receive $12,000 annually and Susan $8,000 annually.

The decision to defer OAS

Step 1: Assess immediate financial needs

John and Susan’s current annual income ($40,000 from John's pension + $15,000 from Susan’s part-time work = $55,000) is sufficient to cover their annual expenses of $55,000. With their current income meeting their needs, they can consider deferring their OAS benefits.

Step 2: Calculating the benefit of deferral

• John’s OAS at 65: Approximately $718 per month ($8,620 annually).
• Deferral Rate: 0.6% per month (7.2% per year).
• John’s OAS at 70: If deferred, his OAS increases by 36%, resulting in approximately $977 per month ($11,723 annually).

Step 3: Projecting income and expenses

Over the next five years, John and Susan will continue to draw from their retirement savings to cover any shortfalls and maintain their lifestyle.

Financial plan

1. Retirement savings withdrawal
   They plan to withdraw $10,000 annually from their RRSPs to cover the gap between their income and expenses. Additional withdrawals from their TFSA or non-registered accounts if needed.
    
2. CPP benefits
   Starting at 65, John will receive $12,000 annually, and Susan will receive $8,000 annually, increasing their income to $60,000 (pension + part-time work + CPP).
    
3. Income at age 70
   When John turns 70, his deferred OAS benefits will start, adding $11,723 annually. Susan, who will be 69, will start her OAS benefits at 65, adding $8,620 annually.
    

Financial security and benefits

• Higher OAS Benefits: By deferring, John secures a higher monthly benefit, increasing his long-term financial security.
• Inflation Adjustment: Higher base OAS benefits will mean larger absolute adjustments for inflation, providing better protection against rising costs.
• Tax Efficiency: Drawing from the RRSPs early on can help manage taxable income and potentially reduce future tax liabilities.
• Longevity Planning: Given their good health and family history of longevity, the higher deferred OAS benefits provide a reliable income stream in their later years.

Example conclusion

By deferring his OAS benefits until 70, John ensures a higher monthly income in the future, which is particularly beneficial if he lives longer than expected. This decision is complemented by strategic withdrawals from retirement savings and the coordinated timing of CPP benefits, ensuring that both John and Susan can maintain their lifestyle and financial security throughout their retirement. This is a simplistic example and you should always verify with a Certified Financial Planner®.

 

I hope this blog post cleared up any confusion you had about Old Age Security. As always, please email me your questions; our team would be happy to help!

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This is a general source of information only. It is not intended to provide personalized tax, legal or investment advice, and is not intended as a solicitation to purchase securities. Coby Blystone is solely responsible for its content. For more information on this topic or any other financial matter, please contact an IG Wealth Management Consultant.

 

¹ https://www.canada.ca/en/employment-social-development/programs/pensions/pension/statistics/2024-quarterly-april-june.html

^2. https://www.canada.ca/en/services/benefits/publicpensions/cpp/old-age-security/recovery-tax.html