Should you defer collecting CPP and OAS?

Can you afford to hold off and increase your payments later? Will you need more CPP and OAS later in life? And how long do you expect to live?

Most people know they can start collecting their Canada Pension Plan (CPP) at age 60, even though they’ll get smaller monthly payments than if they waited until 65. Many people just want the money now and don’t care about any added benefits to delaying CPP and Old Age Security (OAS).

The standard CPP and OAS payments are factored to start at age 65. Both increase annually if not taken until later.

The monthly CPP payment amount increases by 0.7 per cent each month after age 65 that you delay taking it, up to age 70. That’s 8.4 per cent a year. So by delaying until age 70, your CPP payments would be 42 per cent higher per month than at age 65.

If you opt to take CPP early, your payments are reduced by 0.6 per cent a month or 7.2 per cent for each year before you turn 65.

There’s no option to take OAS before age 65.

But your monthly OAS payment will increase by 0.6 per cent every month you delay receiving it, up to age 70. That’s a 7.2 per cent annual increase, up to a maximum of 36 per cent at age 70.

Both 7.2 per cent and 8.4 per cent are pretty good annual returns. That would really increase your income from these two plans – if you live long enough to benefit from the increased payouts. This increased pay only benefits you if you live long enough to collect sufficient higher payments.

So should you delay taking CPP and OAS?

It depends on lots of personal items, such as:

  • Do you have enough of your own money to meet your retirement needs?
  • What do you think your life expectancy might be?
  • Is your income high enough that you’re in the OAS clawback range?

For the 2017 income tax year, the OAS clawback (or OAS Pension Recovery, as it’s officially known) starts at $74,778. It’s fully clawed back when your income hits $121,314. The clawback rate is 15 per cent of the income above $74,778.

If you’re going to get hit by the clawback upon retirement or even later, then you should likely not delay taking OAS. Grab what you can at age 65.

The break-even point for both CPP and OAS depends, but it’s often between age 75 to 82. It depends on how you do the math: if you include inflation and present value, and how many years you’ll collect the benefits.

Often overlooked when the break-even calculation is done is the loss of your assets. That’s what happens if you spend your own money instead of CPP or OAS benefits. Spending $1,000 a month of your money instead $1,000 in government benefits lowers the break-even point.

But perhaps you have limited retirement income and you’re likely to run out of money later in retirement. In that case, delaying CPP and OAS would ensure you have decent income when your retirement savings run out. So maybe it’s better to spend your money first to get a greater CPP and OAS benefits later.

As with most financial questions, there’s no one right answer. Check with your financial planner about what’s right for you.

Bill Green is an hourly financial and estate planner, public speaker and author of  The Success Tax Shuffle. Bill has more than 26 years of experience in the financial services industry.

CPP and OAS, benefits, drawbacks

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