When it comes to retirement planning, government pensions are something you will want put into your plans. In retirement your income comes from many sources and it becomes a little bit of a balancing act. With the help of a skilled financial advisor these can be juggled each year so that you do not pay excess taxes!
Should clients defer OAS?
The 2012 Federal Budget introduced provisions that allow for deferral of Old Age Security (OAS). To recap:
- as of July 1, 2013, the OAS pension need not be taken immediately upon reaching the current qualification age of 65 (moving to age 67 in 2023);
- deferral of OAS payments beyond the qualification date (currently the 65th birthday month) is allowed for up to five years;
- for each month deferred, a premium of 0.6% will be added to the pension, which works out to as much as 36% if deferral is for the full five years.
Ideal age to begin?
The key step is determining the crossover point. This is done by comparing two program start ages (year and month) to find the point where someone could be indifferent in choosing either.
Assume someone takes her full OAS at 65, versus the 136% at age 70. At what age would she have received exactly the same total nominal dollars? If she lives past that age, she would maximize her receipts if she’d chosen the deferred start date, and vice versa.
This, admittedly, is a simplistic calculation. A true measure of the economic trade-off would require looking at:
- 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;
- marginal tax rate, including the effect further income may have on provincial and federal tax credits, and potential clawback of OAS itself.
These calculations can be misleading, but for the sake of argument here is the arithmetic.
Common comparison ages
For simplicity, let’s assume monthly rather than quarterly indexing. This allows calculating ages without having to use current or later actual OAS payment amounts. The table shows full calendar years, but comparisons were calculated for all 61 possible start months.
Comparing age 65 to 70 (see “Crossover points,”), 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 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 (the attained age would be age 79).
A year to think on it?
What about retroactive OAS payments after a late application? Service Canada says these applicants can receive 11 months’ worth of payments. They can choose a lump sum and have ongoing payments based on the earlier qualification month, or start monthly payments based on the indexed figure. Applicants should apply six months before intended commencement date to allow for processing.
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