Posted By By Mark Seed, MyOwnAdvisor
Special to the Financial Independence Hub
Long-time readers of this blog will know I remain many years away from full-on retirement – so I have tons of time to consider when to take our Canada Pension Plan (CPP) benefit and our Old Age Security (OAS) benefit.
For those who might be closer to retirement age and/or you want to know when to take CPP or OAS, make sure you read these posts below!
These are the best options when to take CPP.
Should you defer CPP to age 65 or even age 70? Here’s when to consider that.
One factor rarely covered on many blogs or financial forums is the subject of survivorship benefits for either program. It can be a major factor when determining when to take CPP or OAS for some.
What are the pros and cons of taking CPP or OAS early or late, when you factor in survivorship benefits?
Like other financial subjects, I have my own ideas based on our financial plan but I wanted to talk to an expert. I reached out again to Doug Runchey, a pension specialist who has more than 30 years of experience working with both CPP and OAS programs.
In our latest discussion, we tackle the survivorship subject and what general rules of thumb apply.
Doug, welcome back. Good to chat again and I hope you’ve been well …
Thanks for having me back again Mark.
I always appreciate the outreach for a take on this important subject. I agree, this isn’t talked about enough: how survivorship factors into government benefits decision-making.
For those folks not familiar with the benefits of CPP, can you remind them about the factors they should consider – when to take CPP?
The most important thing is to know exactly what your real choices are, because the numbers on your SOC or online at the MSCA website are not always very accurate. Once you have accurate numbers, you should consider factors like life expectancy, taxation, impact on other benefits (e.g., GIS), estimated expenses and other income streams.
When to take your CPP should be integrated with your overall financial retirement plan.
As we discussed in a previous post, there are some reasons to take CPP or OAS as early as possible:
- you need (and want) the money to live on now (probably the biggest reason)!
- you have good reason to believe that you have a shorter-than-average life expectancy; take the money now and spend as you please.
- you already have a good reliable defined benefit pension with full indexing and the CPP and OAS are “gravy”;
- you want to delay taking your portfolio withdrawals since you may wish to maximize the amount of money in your estate; and/or
- you are a “bird in hand” investor so you take Canada Pension Plan money now while you can.
Great reminders. So, what about the survivorship benefits of CPP? How are these calculated? Should that play into the decision, when to take CPP?
They should Mark.
CPP survivor’s pensions are based on two different formulas, depending on the age of the surviving spouse.
For now, let’s just consider the formula for survivors over age 65 and that is 60% of the deceased contributor’s “calculated CPP retirement pension.”. By “calculated,” I mean prior to applying the age-adjustment factor if they started receiving their retirement pension before/after age 65. This 60% is reduced however, if the surviving spouse is also in receipt of their own CPP retirement pension, under what are known as the “combined benefit” calculation rules.
These combined benefit calculation rules should definitely be a factor in deciding when to take your CPP if the survivor’s pension is in play prior to making that decision, but probably not otherwise.
Shall we look at an example, from a couple that prefers the “bird in hand” income?
To demonstrate these combined benefit calculation rules, let’s use an example where the husband’s calculated CPP was $1,000 and the wife’s calculated CPP was $700.
If they both took their CPP early at age 60, they would each receive 64% of their calculated CPP, which would be $640 for the husband and $448 for the wife.
If the husband passed away at age 70, the wife would normally be eligible for 60% of his calculated CPP, which is $600. Under the combined benefit rules though, that amount is reduced by 40% to $360.
As a result, the survivor’s retirement pension is increased by a “special adjustment” in the amount of $86.40 (36% of the $240 reduction to the survivor’s pension). The net combined benefit that the wife would receive is then $894.40 (her original retirement pension of $448, the reduced survivor’s pension of $360 and the “special adjustment” increase to her retirement pension of $86.40).
Are there any survivorship benefits to OAS? If so, what are the considerations?
The OAS program doesn’t offer any true survivor’s benefits that would begin when a spouse dies.
The only thing that could even remotely be considered a survivor’s benefit under the OAS program is the Allowance for a Survivor. This is a benefit that is available to anyone who is between the age of 60 and 65, has “low income” (under $25,080) and hasn’t remarried or lived common-law since the death of their spouse or common-law partner.
Now that we know CPP has better survivorship benefits than OAS, does this make it a stronger case to delay CPP vs. OAS?
Deferring CPP does not increase the CPP survivor’s pension amount, as you saw above, because that is based on the “calculated CPP” and not the actual CPP. I don’t make the rules Mark, I just explain them and provide the calculations!
For example, someone with a calculated CPP of $1,000 could take their CPP at age 60 in the amount of $640 or take it at age 70 in the amount of $1,420, but their over-age-65 spouse would receive a survivor’s pension of $600 (60% 0f the calculated CPP of $1,000) regardless when the deceased spouse took their CPP.
In closing, if you had to highlight one or two takeaways about CPP and/or OAS when it comes to survivorship benefits, what are those key messages for readers?
The most important takeaway is for those people who are receiving a CPP survivor’s pension prior to receiving their own CPP retirement pension.
The combined benefit calculation rules should play a major factor in deciding when to take their own CPP, and don’t believe anyone who tells you that the rules are as simple as that you will receive all of both benefits, subject to the maximum of a single retirement pension, because you NEVER receive all of both benefits, and the survivor’s pension is ALWAYS reduced when it is combined with a retirement pension.
Great points Doug and thanks very much.
How are we going to manage CPP and OAS?
When it comes to our financial plan, it has me/us taking our CPP no earlier than age 65 and taking OAS at age 65.
I/we will do this for this key reason: the CPP deferral increases by 0.6% per month between ages 60 and 65 and increases even more by 0.7% per month between ages 65 and 70.
I figure deferring CPP to at least age 65 is a simple, guaranteed way to get inflation protection built-in to my senior years with no risk to my personal portfolio.
The longer I can delay CPP, the better and I might even defer that benefit until age 70.
Your mileage may vary.
I recently shared this detailed 3,000+ word post about My Financial Independence Plan. You’ll see I’m not trying to rely on CPP or OAS very much at all.
Last but not least, don’t forget to check out my dedicated Retirement page with a growing selection of many retirement essays and stories from successful early retirees. Folks that have essentially been there, done that!
Thanks for reading yet another comprehensive post on this subject I look forward to kicking more ideas around with Doug in future blogposts.
Doug Runchey is a pension specialist who has more than 30 years of experience working with both CPP and OAS programs. Doug contributes to many Canadian financial forums and writes pension-related articles for many financial blogs. He runs DR Pensions Consulting (no affiliation) and is committed to helping people understand the government pension puzzle.
Mark Seed is a passionate DIY investor who lives in Ottawa. He invests in Canadian and U.S. dividend paying stocks and low-cost Exchange Traded Funds on his quest to own a $1 million portfolio for an early retirement. You can follow Mark’s insights and perspectives on investing, and much more, by visiting My Own Advisor. This blog originally ran at MyOwnAdvisor.ca on Nov. 30, 2020 and is republished here with permission.
