Old Age Security (OAS) is a government payment to Canadians over the age of 65. The payment amount is based on the number of years you’ve been a resident of Canada. If you have lived here for 40 years after 18, you will get the full amount at age 65. Immigrants who have been here at least 10 years will receive a calculated proportion.
As of October 2019, a full OAS pension is $613.53 a month, which works out to a little over $7,362 annually, with the amount indexed on a quarterly basis.
An example, contemplating retirement
So let’s say you’re turning 65 in December and are ready to retire. However, you’re in line for a $30,000 bonus on top of your regular $100,000 if you stay for the culmination of a big deal you’ve worked on that will close late next year.
Whether or not you remain at work, you’re entitled to start your OAS in January, the month after you turn 65.
You’re single, you feel like you can comfortably manage on a retirement income of $60,000, and you plan to start your Canada Pension Plan as soon as work ends. So when should you start OAS? If you want to get the most value out of it, here’s what you need to know.
Should you defer OAS?
For every month a person defers OAS, there is a 0.6% premium increase to the base amount. You can defer until age 70 – that’s 60 months yielding a maximum 36% premium. It’s a trade-off between money in the hand, and future money if you expect to live a long life. There is no right or wrong choice here, it’s all a matter of timing.
What’s the OAS clawback?
OAS comes out of general government tax revenue. To keep that public cost down, a 15% recovery tax, known as the ‘clawback’, is imposed if your income exceeds a certain level. The figure is indexed annually, and for 2019 stands at $77,580, meaning that full OAS would be clawed back once income exceeds $126,058. Even with indexing going into 2020, your target income of $60,000 would be well below the clawback level if you begin OAS in January. But if you make that $130,000 income next year, the full clawback would apply on OAS you receive that year.
The OAS recovery tax period
The OAS recovery tax year runs from each July 1 to June 30. This allows for tax filing information from the preceding April to be factored into upcoming OAS payments. Again, if you were to earn $130,000 in 2020, all OAS paid that year would be subject to clawback. Rather than a lump sum recovery tax payment being required when you file your 2020 return in April 2021, the recovery tax would be spread across 12 months as a deduction from OAS payments from July 2021 to June 2022.
In sum, the OAS received for the year beginning the January when you turn 65 would entirely be given back from the following July to the next June. You would continue to get your full OAS (as indexed) after that.
The right time to start OAS
Alternatively, given that you would lose that year of OAS anyway, you could delay your application and begin your OAS one year later at the beginning of 2021 when you are 66. Using the 0.6% premium, a 12-month deferral equates to a 7.2% increase, which in current dollars would be over $500 more in OAS payments for you each year.
So overall, it’s a good idea to take a close look at your latest income before you apply for OAS, especially if it’s as you are coming out of your high-income working years.