Tag: OAS

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.

Your quinquennial retirement check-in: A five-year tax retrospective

No, “quinquennial” is not part of my everyday vocabulary.  It is however a handy milestone for evaluating retirement planning progress, if not on an immediate personal basis then at least in terms of changes in the tax landscape.  

By its nature, the retirement/tax system evolves incrementally, principally in step with the annual federal budget process.  To those of us involved day-to-day in the financial advisory field, at times such change may seem to flow as slow as molasses in January.  By contrast, the general population might only contemplate these matters periodically – often only when prompted by their advisors – so developments may appear more momentous once brought to their attention.   

However, over the most recent five-year stretch, it could be argued that the sum of these developments is nothing short of astounding, whether planning your own retirement or advising others.  With that in mind, consider how the following items will affect retirement planning conversations today compared to a mere quinquennium ago.  

2008 – Pension income splitting

Technically a little outside the timeframe, pension income splitting was announced in the Halloween 2006 Economic Statement and introduced in the 2007 Budget.  The first opportunity to elect to split up to 50% of such income with a spouse would have been in filing one’s 2007 tax return in/by April 2008.  

In addition to the obvious potential to push income to a lower bracket spouse, the maneuver could help preserve the pensioner’s age credit, fend off OAS clawback and assist in making fuller use of the spouse’s pension credit.

2009 – Tax-free Savings Account

Introduced in the 2008 Budget, Canadian residents over the age of 18 received their first $5,000 annual allotment of TFSA room on January 1, 2009.  

The structure allows for contribution of after-tax funds, with any subsequent growth and withdrawals being tax-free.  In addition, there is a dollar-for-dollar credit on those annual withdrawals that increases contribution room the next January 1st.  Apart from being a welcome gift for those with excess cash to invest, the TFSA offers lower bracket individuals a more viable alternative or complement to the traditional RRSP structure.

The indexing formula boosted the annual dollar limit to $5,500 beginning in 2013.

2010 – Canada Pension Plan

While it is patently obvious that this is not a new program, the 2009 triennial review proposed significant changes to the CPP.  These changes were legislatively approved in 2010.

With the elimination of the work cessation test, it became administratively simpler to commence a retirement pension, and all future pensions will be marginally improved as the low earnings drop-out increases from 7 to 8 years.  However, the decision as to when to commence that pension has become more complicated with new mandatory premium payments for working beneficiaries (voluntary after 65), an increased monthly early take-up penalty from 0.5% to 0.6%, and an increased monthly deferral premium from 0.5% to 0.7%. 

2011 – Registered Disability Savings Plan

The RDSP was actually introduced in the 2008 Budget, but took 2 or 3 years of tweaking before those in the target population could fully avail themselves of the program.

A key benefit is the access to matching Grant and free Bond support money.  The 2010 Budget made provision for carryforward of unused Grant and Bond entitlements.  Perhaps the most important modification occurred in the 2011 Budget with the relaxation of stringent rules that up to then would have forced mass repayment of Grant and Bond money at inopportune times.  

The RDSP is now coordinated in many ways with the beneficiary aspects of RRSPs, RRIFs and RESPs, making for much more flexible planning options for individuals and families with disability planning needs.

2012 – Old Age Security

The 2012 Federal Budget will probably be most remembered for raising the OAS qualification age from 65 to 67.  Those born prior to April 1958 will remain eligible at 65, with those born after January 1962 having to wait all the way to 67.  The rest of us will be somewhere in between, with the phase-in period ranging from April 2023 to January 2029.  

As well, as of July 2013 an eligible individual may defer OAS pension for up to five years, in exchange for a 0.6% increase in the pension amount per month deferred.

2013 – Pooled Registered Pension Plan

As we head into the next quinquennium, the PRPP warrants mention before signing off.  

Discussed since 2010, the program is aimed at encouraging workplace savings where no current pension arrangement is in place.  The federal tax amendments out of the 2012 Budget are now passed, but there is yet to be any concrete action from the provinces.  As the program design dovetails contribution room with RRSPs, ever more opportunities and trade-offs may lie ahead, further feeding those retirement planning conversations.

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.