Why you should (or shouldn’t) defer OAS to Age 70

I’ve long advocated that anyone who expects to live a long life should consider deferring their Canada Pension Plan to age 70. Doing so can increase your CPP payments by nearly 50% – an income stream that is both inflation-protected and payable for life. If taking CPP at 70 is such a good idea, why not also defer OAS to age 70?

Many people are unaware of the option to defer taking OAS benefits up to age 70. This measure was introduced for those who retired on or after July 1, 2013 – so it is still relatively new. Similar to deferring CPP, the start date for your OAS pension can be deferred up to five years with the pension payable increased by 0.6% for each month that the pension is deferred.

OAS Eligibility

By the way, unlike CPP there is no complicated formula to determine your eligibility and payment amount. That’s because OAS benefits are paid for out of general tax revenues of the Government of Canada. You do not pay into it directly. In fact, you can receive OAS even if you’ve never worked or if you are still working.

Simply put, you may qualify for a full OAS pension if you resided in Canada for at least 40 years after turning 18 (when you turn 65).

To be eligible for any OAS benefits you must:

  • be 65 years old or older
  • be a Canadian citizen or a legal resident at the time your OAS pension application is approved, and
  • have resided in Canada for at least 10 years since the age of 18

You can apply for Old Age Security up to 11 months before you want your OAS pension to start.

Your deferred OAS pension will start on the date you indicate in writing on your Application for the Old Age Security Pension and the Guaranteed Income Supplement.

There is no financial advantage to defer your OAS pension after age 70. In fact, you risk losing benefits. If you’re over the age of 70 and not collecting OAS benefits make sure to apply for OAS right away.

Here are three reasons why you should defer OAS to age 70:

1). Enhanced Benefit – Defer OAS to 70 and get up to 36% more!

The standard age to take your OAS pension is 65. Unlike CPP, there is no option to take OAS early, such as at age 60. But you can defer it up to 60 months (five years) in exchange for an enhanced benefit.

Deferring OAS to age 70 can be a wise decision. You’ll receive 7.2% more each year that you delay taking OAS (up to a maximum of 36% more if you take OAS at age 70). Note that there is no incentive to delay taking OAS after age 70.

Here’s an example. The maximum monthly payment one can receive at age 65 (as of July 2021) is $626.49. Expressed in annual terms, that equals $7,553.88.

Let’s look at the impact of deferring OAS to age 70. Benefits will increase by 0.6% for each month of deferral, so by age 70 we’ll see a total increase of 36%. That brings our annual OAS pension to $10,273 – an increase of $2,719 per year for your lifetime (indexed to inflation).

2). Avoid / Reduce OAS Clawback

In my experience working with clients in my fee-only practice, retirees are loath to give up any of their OAS benefits due to OAS clawbacks. That means designing retirement income and withdrawal strategies specifically to avoid or reduce the OAS clawback.

The Canada Revenue Agency (CRA) calls this OAS clawback an OAS pension recovery tax. If your income exceeds $79,845 (2021) then you are required to pay back some or all of the OAS pension you receive from July 2022 to June 2023. For every dollar of income above the threshold, your OAS pension is reduced by 15 cents. OAS is fully clawed back when income exceeds $129,581 (2021).

So, does deferring OAS help avoid or reduce the OAS clawback? In many cases, yes.

One example I’ve come across many times is when a client works beyond their 65th birthday. In this case, they may want to postpone OAS simply because they’re still working and don’t need the income. In some cases, the additional income received from OAS would be partially or completely clawed back due to a high income. Deferring OAS to at least the next calendar year when you’re in a lower tax bracket makes a lot of sense.

Aaron Hector, financial consultant at Doherty & Bryant, says there is a clear advantage to postponing OAS if someone expects their retirement income to push them into the OAS clawback zone.

“Not only will postponement provide them with an enhanced OAS income, it will also in turn provide them with a higher clawback ceiling,” said Mr. Hector.

It might also allow the opportunity to draw down RRSP/RRIF assets between 65 and 70 which would reduce future expected retirement income (lower RRSP/RRIF assets = lower mandatory withdrawals between age 72 and death).

One could also stash any unspent RRSP/RRIF withdrawals into their TFSA. Growing their TFSA in retirement gives retirees the valuable ability to withdraw money tax-free any time and not have that income affect their means-tested benefits (such as OAS).

3). Take OAS at 70 to protect against Longevity Risk

It’s counterintuitive to defer taking pensions such as CPP and OAS (even with an enhanced benefit for waiting) because it forces retirees to tap into their personal savings – depleting their nest egg earlier and faster than they’d prefer. Indeed, people are reluctant to spend their capital.

One thought on “Why you should (or shouldn’t) defer OAS to Age 70

  1. This is another well written and researched article by Robb Engen.

    There is one other ‘softer’ consideration that impacts my thoughts. I believe I can come out ahead by taking CPP at age 65. I still believe there are other merits as well. I am 65 on Oct 28.

    Here is my hypothesis and justification.

    Lets say I defer CPP to age 70. I live to age 84, the average male life expectance. Sadly for me, thats just 19 years away. The breakeven time period of delaying CPP is approximately 12 years. (5 years / 0.42). This means Ill collect only 2 years of 42% more. Based on the full pension today, thats 2 years times approximately $6,000 each year fully taxable. Is it worth it to delay CPP to gain so little? If I die at end of next 5 years, receiving no CPP, i will have lost $70,000 income. . If I die before age 82, I will have lost. Do I need the extra income after age 82, maybe not.

    However, if I take CPP npw,I can invest it in a dividend etf. it will go a long way to make up future shortfalls beyond age 82. So, lets say I take it now. After tax amount is $50,000. By age 82, 12 years invested it might double in value to $100,000 or more and pay dividends of $5,000 a year. I still have some RRSP room too of $22,000. I could put my first $22,000 of CPP into that. But even if I just invest it in a high dividend etf in a non reg account, it could double by age 82. Then there is an inheritance on the first $50,000 invested. Now we could similarly do this with the delayed enhanced CPP but to be fair, we should only compare to the enhanced payment portion and that takes 12 years to make up after age 70. I just do not believe we can catch up. The power of compounding earlier is better than waiting for enhanced benefit and compounding later. Ill have 17 years of compounding my first 5 years of CPP from age 65-70 to the breakeven year of age 82. Delaying CPP I dont get the breakeven amount invested until much later and over a longer 12 year period after age 70.

    I have the extra advantage that I have some RRSP room left of $22,000 and I can fully invest my CPP from age 65-70 and beyond if I wish to both RRSP and non reg accounts. But even if I do not invest any of it, there is no loss if I die by 82 and if I only live a few more years, the enhancement is not worth it. If I think I will live many more years after, then I should at least invest my first 5 years of CPP from age 65-70. Thats what I will do, That covers me in case. Ill spend the rest after age 70 if I wish.

    Make any sense?

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