Maximizing OAS under the New Rules

By Matthew Ardrey

Special to the Financial Independence Hub

The rules surrounding Old Age Security (OAS) changed as of July 1, 2013 with full implementation of these changes by January 2029.

The recent election of the Liberal government, promises to change the age of eligibility back to 65. Thus, we will assume that everyone is eligible to receive OAS at age 65. Continuing with the theme of government pensions, this is the second in a three-part series where we will examine how the remaining changes to the OAS rules will affect your pension payment in retirement.

What is the best age to take OAS?

As of July 1, 2013 you are able to defer your OAS pension for a maximum of 60 months in exchange for a higher pension amount. For every month you delay receipt of your OAS pension, your payment will be increased by 0.6%, to a maximum of 36% at age 70. Deferring GIS will not cause an increase in those benefits.

Looking at the math behind the breakeven calculation and ignoring the personal retirement circumstances that may influence this decision, the following are the breakeven points for taking OAS under the new rules.

Using the current maximum OAS payment and ignoring inflation, the total OAS pension received is greater just before the pensioner reaches the age of 84 if you defer the pension from age 65 to age 70. If 2% inflation is factored in over the time period, then the breakeven age drops to just after age 82. Comparatively, these ages are much later than the deferral breakeven for CPP as seen in part one.

At what age can I start receiving my OAS?

This used to be a simple answer – 65. With the changes to the rules, it all depends on when you were born. If you were born on or before March 31, 1958 there are no changes to the age at which you can start taking your OAS. If you were born on or after February 1, 1962, you will be eligible to take your OAS pension at age 67. If you were born in between these dates, you can find your age of eligibility in the table below.

Note, if you qualify, your Guaranteed Income Supplement (GIS) will be subject to the same age of eligibility changes as OAS.

What is the best age to take OAS?

As the changes to the eligibility age do not start to take affect until 2023, we will concentrate our analysis on how OAS deferral affects those who are about to take their OAS pension today.

As of July 1, 2013 you are able to defer your OAS pension for a maximum of 60 months in exchange for a higher pension amount. For every month you delay receipt of your OAS pension, your payment will be increased by 0.6%, to a maximum of 36% at age 70. Deferring GIS will not cause an increase in those benefits.

Looking at the math behind the breakeven calculation and ignoring the personal retirement circumstances that may influence this decision, the following are the breakeven points for taking OAS under the new rules.

Using the current maximum OAS payment and ignoring inflation, the total OAS pension received is greater just before the pensioner reaches the age of 84 if you defer the pension from age 65 to age 70. If 2% inflation is factored in over the time period, then the breakeven age drops to just after age 82. Comparatively, these ages are much later than the deferral breakeven for CPP as seen in part one. (Insert link to previous blog)

Why would you defer OAS?

With significantly higher breakeven ages for OAS than CPP, is there any value in deferring OAS? There are a few reasons that someone may want to defer their OAS pension.

The first has to do with income taxes. If you are still working at or after age 65, your OAS pension may be taxed at a higher rate than after retirement. This means less money in your pocket on an after-tax basis.

In addition to income taxes, the OAS is subject to a clawback provision, which limits the amount received for higher-income earners. For every dollar over the threshold ($71,952 as of July 2015), $0.15 is clawed back. Once your income exceeds $116,103, 100% of your OAS pension will be clawed back.

Lastly, a later breakeven point will not adversely affect you if you can outlive it. No one can predict how long they will live; however, if longevity is in your family, you may want to consider deferring your OAS pension to maximize your benefits.

Matthew Ardrey is a Certified Financial Planner with T. E. Wealth. He can be reached at its Toronto offices here. He is also on Twitter as @MattArdreyCFP. 

Monday: Part 3 in this series concludes with when is the best time to take CPP and OAS.