Optimal Timing for Initiating Old Age Security Benefits

One of the pivotal questions frequently encountered by retirees is, “When should I start  Old Age Security (OAS) benefits?”

Should OAS be commenced at age 65, or would it be more advantageous to delay starting OAS to age 70?

Understanding Old Age Security (OAS)

Old Age Security is a monthly pension accessible to Canadian citizens and legal residents once they attain the age of 65 or beyond. 

Unlike the Canada Pension Plan, you do not contribute to OAS. Eligibility is contingent upon citizenship or residency. 

The pension is indexed quarterly by the Consumer Price Index and is payable throughout one’s lifetime.

Determining Your OAS Entitlement

Your OAS benefit is based on the number of years you have resided in Canada from the age of 18 onwards. A minimum of ten years’ residency after turning 18 is a prerequisite for eligibility. For the maximum benefit, a residency of at least 40 years after reaching age 18 is required. 

Partial payments can be availed if your Canadian residency is under 40 years during that period. The earliest commencement age is the month following your 65th birthday. 

Survivor benefits are accessible for spouses, with income under $21,168 (2023) being the threshold for qualification.

Current OAS Payment Estimates (July 2023)

If you are 65 in July and have completed 40 years of Canadian residency post turning 18, your monthly payment will be $698.60, or $8,383.20 annually. 

The payment varies according to the years spent in Canada after the age of 18:

• 40 Years – Maximum: $698.60 per month 
• 30 Years: $523.95 per month 
• 20 Years: $349.30 per month 
• 10 Years: $174.65 per month

 

The payment is determined by dividing the years of Canadian residency by 40 and multiplying that by the maximum monthly OAS payment.

Enhancement at Age 75

Upon reaching 75, OAS payments are increased by 10%. For instance, if one is currently 75, the new monthly payment would be $768.46.

Taxation and OAS Recovery

OAS is subject to taxation as ordinary income on your income tax return. Unlike the Canada Pension Plan, OAS cannot be split with a spouse or common-law partner. 

Additionally, the OAS Recovery Tax is a means-tested component, signifying that a specific income threshold triggers partial payback. 

Between ages 65-75, income over $86,912 requires a 15% repayment of the income over,  while income over $142,428 necessitates full payback.

For those aged 75 and above, the recovery tax begins at the same income as $86,912 and is fully paid back when income surpasses $147,418.

Deferment Considerations

Electing to postpone OAS until age 70 results in a 0.6% monthly increase, equating to a 7.20% annual increase. The cumulative increase from 65 to 70 is 36%. For instance:

• Commence at 65: $8,383.20 per annum.
• Deferred until 70: $11,401.15 per annum.

 

Critical Factors to Consider 

Although Bonnie-Jean MacDonald, Ph.D. and Doug Chandler underscore the advantages of OAS deferral, financial decisions should be tailored to individual circumstances. 

A personalized assessment necessitates evaluating projected OAS payouts for you and your partner and integrating them into your retirement income strategy. Considering OAS deferment alongside the Canada Pension Plan (CPP) delay is crucial. With retirement income planning software, you should be able to model the impact on your spending.

Reasons to Defer OAS:

• OAS clawback or recovery tax concerns due to ongoing work or retirement income.
• Significant asset sales trigger potential tax issues at retirement, such as selling a business or property.
• Insufficient residency to qualify for full OAS benefits.
• You have financial assets available to bridge income to age 70.
• You have longevity considerations, aiming to increase your guaranteed lifelong income.
• Timing considerations based on employment income in your year of retirement.
• You wish for inflation protection and reduced investment market reliance.

 

Reasons to Initiate at 65:

• Immediate income requirement.
• The deferral will increase your investment withdrawal rates, potentially depleting investments.
• You may qualify for the Guaranteed Income Supplement Benefit (GIS). 
• Anticipated high post-age 70  income, causing recovery tax.
• Health concerns or reduced life expectancy.
• You wish for wealth maximization and intergenerational wealth transfer as your own investment assets are in place longer.

 

Applying for OAS

Service Canada notifies individuals monthly, beginning at age 64, whether application is necessary. If notification is absent or if deferment is preferred, reaching out to Service Canada is required.

Assess Your Financial Situation

Each person’s and family’s financial circumstances are unique. Consultation with a financial advisor utilizing planning tools is pivotal for determining the optimal OAS initiation age, aligning with personalized factors such as cash flow, tax strategy, withdrawal rates, other income sources, financial holdings, wealth transfer goals, plan success rate, and legacy objectives.

For more information, see the OAS program toolkit 

For more information, refer to Preserving Wealth: The Next Generation – The Definitive Guide to Protecting, Investing, and Transferring Wealth by Jack Lumsden, MBA, CFP®.

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