Understanding your benefit entitlement and strategies to consider.
When planning to exit the workforce, top of mind for most is understanding their new income sources. One source is Old Age Security (OAS), a monthly payment you can start to receive the month after you turn 65. If you’ve lived in Canada for at least 40 years after your 18th birthday, you’re entitled to the maximum benefit which increases on a quarterly basis. For the period APR-JUN 2022, this amount is $648.67.
The month after you turn 64, Service Canada should send you a notification letter that you’ll be enrolled automatically. If you don’t receive a letter, or you get a letter stating that you may be eligible, you’ll need to apply through your My Service Canada account or by mailing in an application.
Should you start taking OAS immediately at 65?
Aside from a known shortened life expectancy (<80), where you’ll certainly want to initiate your benefit as soon as possible, the main decision driver will be your other sources of income due to the OAS clawback (more formally, recovery tax). For every $1 that your net global income exceeds the minimum threshold, $0.15 of your benefit will be subject to recovery tax until the entire benefit is ground down. Consider the sources and flexibility of your other income. A defined benefit pension payment can’t be changed, but the income can be split with a spouse. Timing of RRSP withdrawals or conversion/partial conversion into a RRIF can be delayed to 71 or accelerated to 55, and dividend payments from private companies is discretionary. Understand your income needs and the flexibility of your income sources; it could be beneficial to delay. Every month you do will increase your OAS payment by 0.6% (to a max of 60 months, or 36%).
Why did my OAS payment suddenly drop?
Possible that you’ve entered an OAS recovery tax period. The table below outlines the 12-month recovery tax period and income year applicable to that period. If you’ve noticed a reduction in your OAS payment this July, there was likely a relative increase in your 2021 income.
|Recovery tax period
|Minimum income recovery threshold
|Maximum income recovery threshold
|July 2021 to June 2022
|July 2022 to June 2023
|July 2023 to June 2024
An example: Cathy is divorced and born in 1950. She elected to start receiving OAS as soon as she was eligible at 65, receiving the maximum benefit, which has grown with indexing from her original entitlement of $563/month in 2015 to her most recent payment of $648 in June 2022. Last month, her July OAS payment was significantly reduced or even fully clawed-back. Why? Last year she turned 71 and her RRSP converted into a RRIF, forcing a 5.28% withdrawal of the total RRIF value, which counted as taxable income. With RRIF minimum withdrawal levels increasing as you age, sadly her OAS payment will likely be subject to recovery tax going forward.
The above example highlights the nuance involved in deciding at what age to start taking OAS. For Cathy, the right decision may have been to start taking OAS at 70, but this would have been optimal only if she partially converted a portion of her RRSP into a RRIF at 65. Decisions around funding your retirement can be complex and often irreversible. The team at Welch is here to help you navigate the landscape and provide the support you need to making informed financial decisions.