Should OAS be deferred?

This is a continuation from last week's article, "Are You Planning Retirement for your Clients?"

Unlike CPP, Old Age Security (OAS) will begin automatically at age 65 unless the taxpayer opts out of the automatic enrolment.  Service Canada will send each taxpayer a letter soon after their 64th birthday announcing automatic enrolment and offering the opportunity to opt out.  To do so, the taxpayer must tick a box, sign and return the letter.   That’s something that can be easily missed and it has potentially expensive ramifications.

For each month the taxpayer defers OAS, the pension will be increased by 0.6% with a maximum increase of 36%.  The table below shows both CPP and OAS pension receivable based on the age the taxpayer starts (using 2014 rates).  Actual pension will be more as they will be based on the indexed pension amount at the time the pension starts.

Some taxpayers may assume that the sooner they get the money in their own hands the better off they’ll be.  However, the penalties for starting early and the incentives for starting later will actually result in more received from the Canada Pension Plan (CPP) by the taxpayer if they have a normal lifespan.  For those who live to approximately age 77 (varies depending on individual circumstances), the lifetime CPP accumulation will be higher if they defer and receive the enhanced pension benefits.  Accumulated OAS benefits will be higher for taxpayers who live 15 years after a delayed start date (i.e. age 85 for those who delay to age 70).  The longer the taxpayer lives, the more they will benefit from delaying the start of either pension.  For those who have a lower life expectancy, it may make sense to get the OAS pension as soon as possible (i.e. age 65).

Beyond the increased pension available for delaying OAS, it will make sense for seniors who are subject to the OAS clawback to defer receiving their OAS pension as they will have to repay some or all of it if it is received.

When is it too late?

For those who may already be receiving their CPP or OAS pensions, it may not be too late to change their minds and defer receipt of the pensions.  For both CPP and OAS, recipients have six months after their pension starts to change their minds and opt out of receiving the pension.  If they do apply to cancel their pensions within six months of their start date, they will have to repay all amounts already received.