Apart from proclaiming the passing of the penny, the 2012 Federal Budget will probably most be remembered for raising the qualification age for Old Age Security from 65 to 67.
Somewhat lost in the shadow of that headline was another OAS change that will allow an election to defer the pension, akin to how the Canada Pension Plan may be accelerated or deferred. With the new rule coming into effect in 2013, it may be a good idea for soon-to-be 65 year-olds to get familiar with both the concept and some arithmetic that lies ahead.
Deferral arithmetic
Beginning July 1, 2013, the OAS pension need not be taken immediately upon reaching age 65, again the current qualification age. An otherwise pensioner may defer the payment beyond the 65th birthday month for as long as five years. For each month deferred, a premium of 0.6% will be added to the pension, which works out to 7.2% for one year, or as much as 36% if the deferral is for the full five years. (See Sidebar for comparison with CPP.)
In 2012 Q4 terms the full OAS pension is about $6,540. For a deferral all the way to age 70, the pension would commence at that point at $8,894, though clearly no payments will have been received in the interim. This is expressed in current dollar terms, remembering that OAS payments are in fact indexed on a quarterly basis.
In a couple of recent conversations with colleagues, the inevitable question arose as to what might be the ideal age to begin OAS. In turn, the ‘crossover point’ entered the discussion, a notion I always treat with a large grain of salt as it can be misleading. Still, as a matter of nominal dollars (and viewing the OAS pension in isolation from any other issues or affected payments), it appears that a 65 year-old who expects to live past age 82 will draw more lifetime OAS dollars by deferring commencement to age 70.
Coordinating for clawbacks
For those with known health issues affecting life expectancy, likely it will make best sense to begin the OAS pension as soon as it is available. Beyond that, this is an area where a good financial planner can provide value in exploring the variety of income sources available to the individual, and how they may be coordinated.
One issue that often comes up when looking at OAS is the potential for its clawback if income exceeds the relevant threshold, currently $69,562 in 2012. Even at lower income levels, other clawbacks may apply, including federal and provincial age credits and the GST/HST credit.
It may be worth analyzing the effect of deferring OAS pension in favour of earlier/larger RRIF withdrawals. Potential benefits:
- For those at lower income levels who may as yet be taking little or no RRIF income, this assures that the pension credit can be claimed
- During the deferral period, obviously the clawback will not apply as one is not receiving any OAS pension
- As intended, the eventual OAS pension will be augmented for each month deferred
- The size of the RRIF will be reduced, leading to a lessened value being subject to the post-71 minimum withdrawals which can be a key culprit in being exposed to clawbacks
- And even if the OAS clawback applies later, the pension itself will be larger, meaning that the upper threshold for full clawback will be at a much higher income level
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SIDEBAR: CPP post-65 premium comparison
Interestingly, while the new OAS monthly premium is 0.6%, the upside monthly premium for the CPP is transitioning to 0.7% by 2013 (currently 0.64% in 2012). Both CPP and OAS allow up to five years deferral. Though these are distinct programs, the 2012 Federal Budget stated:
“The adjusted pension will be calculated on an actuarially neutral basis, as is done with the CPP. This means that, on average, individuals will receive the same lifetime OAS pension whether they choose to take it up at the earliest age of eligibility or defer it to a later year.”
One is left to wonder why there is a difference in the premium rates for the two programs, or whether there is an actuarial difference between a CPP pensioner and an OAS pensioner.