If you are considering applying for Canada Pension Plan (CPP) and/or Old Age Security (OAS) within the next year, I have developed a simple checklist with 11 questions to help you understand the advantages and disadvantages of applying for your benefits.
First some background on CPP benefits and OAS pension:
The amount of your CPP benefit is based on how much you have contributed and how long you have been making contributions to CPP at the time you become eligible. Effective January first, CPP is being gradually enhanced. Over the next 7 years contributions will increase incrementally and once the full increase in benefits is available in 2065, it will add an additional $599/month in today’s dollars to the current $1,154.58 maximum, or 52% more. It is important to note that these changes will have little impact on benefits for anyone that applies for CPP in the next 5 years.
The standard age to begin receiving CPP is the month after your 65th birthday. You can elect to take a reduced pension as early as age 60 or an increased pension as late as age 70, doing so will impact the amount of your benefits.
If you take CPP early, your monthly benefit will be reduced by 0.6% for each month you receive it before age 65, 7.2%/year or 36% less if you begin at age 60. If you delay CPP, your monthly benefit will increase by 0.7% for each month you defer receiving it after age 65, 8.4%/year or 42% more if you begin at age 70.
The OAS pension is a monthly payment available to Canadians aged 65 and older who meet the legal status and residence requirements. Benefits are adjusted quarterly based on the prevailing Consumer Price Index. For the first quarter of 2019 the maximum benefit is set at $601.45/month.
You can elect to defer receiving your OAS pension to age 70 in exchange for a higher monthly amount. If you delay OAS, your monthly pension will increase by 0.6% for each month you defer receiving it after age 65, 7.2% / year or 36% more if you begin at age 70.
OAS pension is also subject to a recovery tax or claw-back, if your net annual world income exceeds the threshold amount set annually. For 2019, to the extent your income is greater than $77,580, you must repay 15% of that amount.
Complete this checklist if you are considering applying for CPP and/or OAS within the next year. If you answer yes to one or more of the following statements, you should ask your advisor to carefully assess the optimal age for you to begin taking CPP and/or OAS.
The following statements apply to both CPP benefits & OAS pension:
- I do not have an indexed pension plan. [ ] Yes [ ] No
- I am a conservative investor and avoid taking risks. [ ] Yes [ ] No
- I have accumulated significant retirement savings. [ ] Yes [ ] No
- I plan to continue working past age 65. [ ] Yes [ ] No
- I do not require CPP/OAS to support my income needs. [ ] Yes [ ] No
- I am 10 years older/younger than my partner. [ ] Yes [ ] No
- I am in good health and expect to live well into my 80’s. [ ] Yes [ ] N
The following statements apply only to OAS Pension:
- I have a business I may sell or that owns investments. [ ] Yes [ ] No
- I may have net income >$77,580 between age 65 and 70. [ ] Yes [ ] No
- I may sell real estate other than my home before age 71. [ ] Yes [ ] No
- I file my income taxes as a single tax payer. [ ] Yes [ ] No
INTERPRETING THE RESULTS
Answering No to all the above questions does not mean you should rush out and apply for CPP and/or OAS, and one Yes answer does not mean you should not apply.
CPP and OAS must be planned separately, as sometimes it will be beneficial to defer one but not the other. Below is a short explanation of the considerations you should discuss with your financial advisor prior to making an application for CPP benefits and/or OAS pension.
- I do not have an indexed pension plan:
If you or your partner do not have a guaranteed, indexed pension plan, CPP and OAS offer significant guarantees that you cannot outlive. By deferring both, the combined maximum will increase from $1,756 to $2,457 PLUS cost of living increases.
- I am a conservative investor and I avoid taking risks:
As a conservative investor it may be difficult to earn even 5% annually on your investments. For each year you defer benefits you will earn 8.4% increase on CPP benefits and 7.2% on OAS pension, a significantly higher return compared to other types of conservative investments.
- I have accumulated significant retirement savings:
If you have accumulated a large amount in retirement savings, you could save significant tax by deferring CPP and OAS and replacing this income by drawing down on retirement savings. This will help to lower minimum withdrawals at age 71 and reduce future estate taxes.
- I plan to continue working past age 65:
If you plan to work from 65 to 70 and do not need CPP and/or OAS to live on, deferring benefits will help to reduce longevity risk (the risk of outliving your money). If you are working past age 65 and require additional income, consider deferring only OAS as this is subject to claw-back should your net income exceed $77,580.
- I do not require CPP/OAS to support my income needs:
If you are fortunate enough to not require CPP and/or OAS, deferring payment offers an excellent tax-deferred return that is guaranteed and may be worth considering.
- I am 10 years older/younger than my partner:
If there is a large age difference between you and your partner, the question of when to start CPP or OAS and the impact the decision will have on the surviving partner, is best answered with an integrated financial analysis using professional financial planning software.
- I am in good health and expect to live well into my 80’s:
If you or your partner expect to live a long time in retirement, then deferring CPP and OAS will provide excellent returns and reduce longevity risk (the risk of outliving your money).
- I have a business I may to sell or that owns investments:
If you have corporate investments, or plan to sell a business in retirement, this may trigger additional personal income that could result in loss of OAS pension unless you defer to age 70.
- I may have net income >$77,580 between age 65 and 70:
If you expect to you have high taxable income between age 65 & 70 that may claw-back all or part of your OAS pension, deferring payment to age 70 will increase your pension by 36% and remove the possibility of claw-back prior to age 70.
- I may sell real estate other than my home before age 71:
If you plan to sell real estate in retirement, in addition to paying capital gains tax, you could have all or part of your OAS clawed-back if you do not consider this prior to applying for OAS.
- I file my income taxes as a single tax payer:
If you are a single tax payer you do not benefit from income splitting with a partner, as such it is much easier to have all or part of your OAS clawed-back and so careful consideration should be given to when you apply for benefits.
Knowing the absolute best age you should apply for CPP benefits or OAS pension is a near impossible task, but knowing when not to apply only requires self-reflection and a basic understanding of retirement planning. Investing a little time to objectively consider your situation before submitting an application, can help you avoid costly mistakes and save you thousands in unnecessary income tax.
If you’re still not sure when to apply, why not book an appointment with a financial planner.