Evelyn Jacks: Retirees Need Help Understanding Public Pensions

People can retire at any age, but it is increasingly rare for people to simply go from earning income from employment or self-employment directly to withdrawing income from investments and other sources including pensions.

After the financial crisis, and as a result of changing demographics, most people will continue to work well into their 60s and possibly 70s, if they can maintain their health.

Close to five million Canadians are reporting Old Age Security (OAS) income today, and over six million tax filers are reporting Canada Pension Plan (CPP) benefits. But recent pension reforms are providing important new planning opportunities that started in 2012. This has been bewildering to some, who confuse the “universal” OAS benefits (everyone who is age 65 may qualify for OAS so long as they’ve been resident in Canada 10 years) with benefit payments from the CPP, which come from contributions by the individual and their employer throughout a working life.

You need to know the difference: one plan is contributory (CPP), the other is universal (OAS), but the amounts you’ll receive monthly will depend on when you choose to start receiving the money. In the case of the OAS, what your income level is makes a difference, too.

As of July 2013, OAS recipients can elect to defer taking their OAS pension for up to five years – this would provide for a larger pension then. Tune in next time for instructions on how to postpone the OAS.

However, keep in mind that those five years will represent 22% of the life expectancy of a male after 65 and 20.5% of the life expectancy of a female. Therefore, for the average man, the bump in the OAS needs to be at least 28.9% to make up for the lost earnings in postponement. For the average woman, the bump needs to be at least 25.8%. The maximum OAS deferral of five years will result in a 36% increase in benefits received at that time, so you will normally benefit from deferral if you live beyond your 79th birthday. That is, you will receive a larger lifetime OAS benefit if you have deferred one year for each year you live beyond age 79.

For high-income earners who are subject to the OAS clawback, the deferral will not result in a current year loss of income and could increase future cash flows. In short, for these individuals there is nothing to lose in choosing the postponement. 

It’s Your Money. Your Life. Take the time to check out the changes to CPP and OAS and ask your tax or financial advisor how these changes will impact your retirement plans. A highly qualified MFA-Retirement Income Specialist can help develop tax efficient projections to help you make those decisions.

Evelyn Jacks is president of Knowledge Bureau and author of 51 books on tax and personal wealth management. She is also the founder and director of the Distinguished Advisor Conference (DAC). The theme of the 2014 three day think tank in Horseshoe Bay, Texas Nov 9-12 will be “Think BIG: Find the Sweet Spots in Wealth Management”  Follow Evelyn on Twitter at @EvelynJacks.