Tag: Deferral

New OAS option begins July 1, 2013 – Deferral decision on turning 65

About six months ago in this space, I wrote about the provision introduced in the 2012 Federal Budget that allows for deferral of Old Age Security (OAS).  To recap:

  • Beginning July 1, 2013, the OAS pension need not be taken immediately upon reaching the current qualification age of 65 (moving to age 67 beginning in 2023).  
  • The new option allows an otherwise pensioner to defer commencement of OAS payments beyond the qualification date (currently 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 deferral is for the full five years.

Ideal age to begin?

Since that earlier article, I have had further conversations in meetings and our Infoservice has fielded a number of calls on the notion of the ‘crossover point’.  Conceptually this is a comparison of starting the program at two given ages (year and month) to determine the point at which one might be indifferent between the two start dates.  (This concept has come up for years in reference to the Canada Pension Plan, which has even more complications than what is being discussed here with respect to OAS alone.)

For example, if you took your full OAS at 65 versus the 136% at age 70, at what age would you have received exactly the same total nominal dollars?  If you live past that age then receipts will have been maximized if the deferred start date had been chosen, and vice versa.  Necessarily this is a simplistic calculation.  A true measure of the economic trade-off would require a much deeper inquiry, including:

  • An inflation factor to estimate time value of money, or alternatively an assumed rate (and type) of  return on amounts received between the first and second start dates,
  • Household circumstances, including spouse’s RRSP/RRIF and other savings/income sources, OAS entitlement, current age and life expectancy, and
  • Marginal tax rate, including the effect that further income may have upon provincial and federal tax credits, and potential clawback of OAS itself.

So while generally I continue to resist this as effectively amounting to a guesstimate – and a potentially misleading one at that – the curiosity factor clearly persists.  For the sake of scratching that itch, we decided to do the arithmetic, but with the proviso that this should be viewed as an academic exercise only.  

Common comparison ages

For simplicity we assumed monthly indexing (actual is quarterly), effectively meaning that we could calculate the ages without the need to know/use current or later actual OAS payment amounts.  In the accompanying table we are showing full calendar years, but we did in fact calculate the comparisons across the whole array of 61 possible start months.

As you can see at the extreme comparing age 65 to age 70, the total receipts would be the same at age 84 (rounded up by about a month).  Predictably, as the start age moves up a year, the attained age or indifference point moves forward by one year.  Not shown in the table is the comparison of a mere one month deferral for someone turning 65 – for interest, the attained age would be age 79. 

A year to think on it?

Along the way, one caller to our InfoService posed a particularly interesting question: What are the implications for those seeking retroactive OAS payments upon making a late application?  As it stands, up to 11 months of past payments may be obtained when a late application is made.

We contacted Service Canada for guidance, and confirmed that retroactive payments may still be obtained.  An applicant can choose to receive the lump sum and have ongoing payments based on that earlier qualification month, or start monthly payments fresh based on the indexed figure.  Don’t leave it too late though, as they recommend applying six months ahead of any intended commencement date, in order to accommodate for processing time.

OAS Deferral – Not just another crossover calculation

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.

Five tax principles for building better portfolios

Successful portfolio building is most often achieved – and repeated – when chosen strategies rest upon time-tested foundations.  

Such investment strategies in turn should incorporate or at least consider tax implications, given that almost half of investment returns can be lost to taxes. As the old adage goes, “It’s not how you make out; it’s what you take out.”

Here then are five tax principles that should underlie every client portfolio. Individually and in combination, these principles can help investors to achieve some absolute tax savings and otherwise defer the incidence of tax to a later date.

1. Cash preservation due to tax deferral

According to the concept of time value of money, a dollar received today is preferred to one to be received in future, all else being equal. Similarly, delaying an expense – such as a tax payment – keeps more cash available to an investor for the present and allows the potential for continuing gain in investment value until that payment comes due. 

2. Less recognition through lower distributions

Income is generally a desirable thing, but for a mutual fund investor not seeking current income, it can be frustrating to receive unwanted distributions. Apart from having to redeploy those distributions – often right back into the same investment vehicle – there is current tax to be paid on that realized income and thus less money continuing to be invested.

3. Tax-preferred income with capital gains and dividends 

It is not uncommon for novice investors to assume that investment income, like employment income, is fully taxable. Isn’t it as simple as totalling up your income and applying the appropriate tax rate to find out how much you owe? In truth, there is an important distinction as to the type of income before you apply that tax rate – such as one-half taxable capital gains and possibly lower effective rates on dividends.

4. Rebalance holdings without triggering taxation 

It is important for an investment portfolio to be responsive to changing needs, whether prompted by market forces or investor circumstances. Within registered accounts like RRSPs and RRIFs, rebalancing may be undertaken without fear of triggering taxes. For non-registered accounts, however, dispositions generally trigger unrealized capital gains – except where a structure like a mutual fund corporation is used to defer that taxation.

5. Easing recognition via controlled drawdown 

Retirees’ views on investment income taxation may be anchored in the registered investment world, specifically RRIFs. As registered accounts are held in pre-tax form, withdrawals are fully taxable. On the other hand, non-registered investments originate from after-tax funds and each withdrawal is normally a combination of non-taxable capital and one-half taxable capital gains – and it is even possible to have the early distribution of the non-taxable capital from some investment structures like mutual funds.