With the federal government announcing changes to benefits paid to older Canadians, many people have questions and concerns about how it will affect their retirement income. Not only will Canadians have to wait longer to receive Old Age Security (OAS) payments, but another change to the rules means that people who opt to start receiving payments later will receive a higher amount each month. Does it make sense for you to decide to delay OAS payments to get more money later on? Let’s look at your options carefully to help you determine which choice is best for you.
Old Age Security Basics
As a Canadian you are entitled to receive certain government pension benefits such as Old Age Security (OAS) and Canadian Pension Plan (CPP) which are two very separate retirement programs. CPP eligibility is based on contributions that you have made during your working life while OAS is based on residency.
OAS is available to all Canadian residents who have lived in the country for at least 10 years after the age of 18. You can even receive benefits if you are living outside of the country when you apply for them if you have lived in Canada for at least 20 years or more after you turned 18.
Your OAS considered taxable income. If your personal net income is over $69,562.00 (including the OAS benefit), it will start getting clawed back at a rate of $0.15 in OAS dollars for each dollar you earned over that amount.
OAS – Delaying Benefits Until Age 67
Under the new rules, the age of eligibility for OAS benefits will gradually increase to 67 from 65 but this doesn’t start to happen until 2023 and it will take place over 28 one-month increments. If you were born after February 1962, you will not be eligible to receive your OAS benefit until age 67.
If you will be affected by the new rules and have been planning to exit the work force at 65 or earlier make sure the delay in OAS benefits have been factored into your calculations. Or if you are a physical laborer or have ill health and will unlikely be able to work past 60 let alone 65 then retirement planning is a must! I highly recommend you make an appointment with your financial advisor today.
OAS – Delaying Receipt of Your Benefits
Starting in 2013, you can choose to delay receiving your OAS payments for up to five years. This is similar to the Canadian Pension Plan which already pays you more the longer you delay your benefits.
For each year you defer your OAS benefits your payments will be increased by 7.2 percent. The maximum amount that someone who is 65 years old receives today under OAS is $6,481.00 per year or about $540.00 per month. If you were eligible to receive the maximum OAS benefit and decided to defer payments for one year, your annual payment will increase by $467.00. Waiting the full five years to start receiving payments means you will get an additional $2,233.00 per year ($186.00 per month).
Choosing to Defer OAS Payments
Here are a couple of scenarios where it can make sense to defer the start of OAS payments:
- You are in good health and expect to live a long life in retirement.
The average life expectancy for Canadians is 77 years for men and 82 years for women. If your relatives had longer than average lives, then you are more likely to follow suit. If you’re healthy and enjoy your work, delaying retirement is a great way to boost your income and investment portfolio but only if you continue to save and avoid tapping into your retirement funds.
- You plan to work after age 65 and are in a high tax bracket.
Keep in mind that OAS benefits are taxable. If receiving them at age 65 will result in your being placed in a higher tax bracket or having the benefits clawed back, it can make more sense to wait to receive them.
Basically, those who are willing or able to delay their OAS benefits will be financially rewarded later on with higher payments. Before making a decisions on deferring, be sure to talk with your financial advisor to determine if this is a good strategy for you.
The bottom line, if your retirement will be affected by the new rules to your OAS benefits you still have plenty of time to plan and save to accommodate these changes. A financial advisor can greatly help with the planning process. Please feel free to contact me to get answers to your questions about Old Age Security benefits and other retirement issues.