In the past, when I worked on our financial planning for retirement, I had always assumed that we wouldn’t qualify for Old Age Security (OAS). Or that it wouldn’t be very much money. To my surprise, couples can have up to $150,000 in combined taxable income before OAS starts to be clawed back! And it’s not fully clawed back until you reach a combined income of over $250,000!
Keep reading to discover more about Old Age Security, including what it is, who is eligible to receive OAS, how much will you get, is it taxable and when is it clawed back, how to apply, and should you defer OAS beyond age 65.
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1. What is Old Age Security (OAS) and How is it Funded?
Old Age Security is Canada’s largest pension program, states the Government of Canada’s website. It is funded out of general tax revenues to the Canadian Government. That is, you do not “pay into it” as you would for a true pension plan.
OAS is based on living in Canada – not working in Canada. You don’t “pay into it” like the Canada Pension Plan (CPP).
2. Who is Eligible for OAS?
Here are the requirements to be eligible for OAS, at the time of writing:
- Age 65 and older, regardless of whether you are still working or retired.
- Are a Canadian citizen or a legal resident of Canada
- Have lived in Canada for at least 10 years since you turned 18.
- Employment is NOT a requirement. That is, you can receive OAS even if you have never worked at all, or never worked in Canada.
- If you live outside of Canada, you may still be eligible for OAS. Read the current requirements.
3. How Much Old Age Security will I Receive?
The current OAS maximum monthly payment is $613.53, and is not affected by your marital status. This is current for the months of October to December, 2019. OAS is indexed to inflation, and it increases four times per year, as required.
This works out to an annual income of $7,362.36 per person.
See the Government of Canada’s current OAS payment amounts.
You will be eligible for the maximum OAS if you have lived in Canada for at least 40 years since age 18. If you have lived in Canada for at least 10 years since age 18 but less than 40 years, you will be eligible for 1/40th of the full OAS pension for each complete year of residence.
That is, if you have lived in Canada for 25 years, you would be eligible to receive $613.53 × 25 ÷ 40, or $383.46 per month.
Married or Common-Law Couples
If you have been living with your partner for over one year, you are considered to be a common-law couple for the purposes of Government of Canada benefits.
Married or common-law couples who are both eligible for OAS will each receive $613.53 per month. This gives a total household income of $14,724.72 per year.
Widowed Survivor Benefits
There is a survivor benefit for Old Age Security pension if:
- Your spouse has passed away (this could be recently passed, or passed away many years ago, even if they were under age 65 at the time).
- You are now between the ages of 60 and 64, including the month of your 65th birthday.
- You’re a Canadian citizen or legal resident.
- You currently reside in Canada AND you have lived in Canada for at least 10 years since age 18.
- You have not remarried or entered into a common-law partnership since your spouse passed away.
- Your annual income is below $25,056.
If you meet all of these requirements, the survivor benefit is $1,388.92 per month.
If your spouse or common-law partner passes away and you are over age 65, there is no survivor benefit for Old Age Security.
You cannot defer survivor benefits, so you should apply 6-11 months before your 60th birthday, or as soon as your spouse passes away if you are already over 60.
More information on survivor benefits is available at the Government of Canada website.
Jonathan Chevreau writes in The Financial Post that if your partner defers OAS and then passes away, you can apply to receive 12 months of retroactive OAS payouts. The government treats this as if s/he had applied 1 year prior to death. Payments end on the month of death, so this is a limited one-time benefit to help the surviving partner. This is different than the survivor benefits listed above.
You may choose to defer your Old Age Security, instead of starting at age 65. You can delay the start of payment for as much as 60 months (5 years), up to age 70.
If you delay the start of OAS, your monthly payment will increase by 0.6% for each month that you wait, up to a maximum of 36% at age 70.
In that case, the $613.53 per month would rise to $834.40! For a couple, that would equal $20,025.62 per year if both delay OAS until age 70.
4. How is OAS Paid and is it Taxable?
Old Age Security is paid monthly, and can be direct deposited into your bank account.
OAS is a taxable benefit. That is, you must include this income on your annual tax return. If your income is high, then some or all of the OAS benefit may be taxed back. For this reason, if you are not retiring right at 65 and your income is still high, you may choose to delay the start of OAS until after you retire or age 70.
If your income in 2018 was over $75,910, you will have to repay part of your OAS pension in income tax. You will repay 15% of the difference between your income and the threshold level.
The maximum income you can make (from all sources) to be eligible for OAS is currently $126,058 per year. This is individual income, NOT combined family income. At this level of income, OAS would be fully clawed back.
For example, if you earned $86,000 in 2018, as reported on your income tax statement, your clawback is calculated as follows:
$86,000 – $75,910 = $10,090
$10,090 × 15% = $1,513.50
You would be required to repay $1,513.50 for the period July 2019 to June 2020.
You do NOT have to repay this $1,513.50 in one lump sum! Instead, your OAS payments from July 2019 to June 2020 will be decreased.
$1,513.50 ÷ 12 = $126.13
Your monthly Old Age Security pension would be decreased by $126.13 for the next 12 months as a recovery tax.
Smart Ways to Avoid Clawbacks
If you are married or common-law and one half of the couple earns more than $75,910, you should look into ways to (legally) income-split with your partner. If you can fully income-split, as a couple you could earn $151,820 in taxable income before any OAS is clawed back.
Use taxable deductions to lower your taxable income, such as contributing to your own RRSP or a spousal RRSP.
If your taxable income is getting close to $75,000, withdraw any additional funds from your non-registered accounts or TFSA, rather than your RRSP or RRIF. Non-registered account and TFSA withdrawals do not count as taxable income.
Income shift in time, to make withdrawals from your RRSP before you start collecting OAS. If you decide to defer OAS until age 70, you may wish to make larger withdrawals from your RRSP in the years between 65 and 69.
Help! These Clawbacks will Cause me Financial Hardship!
If having your OAS clawed back will cause you financial hardship, you are encouraged to contact the Canada Revenue Agency to ask them to review your situation.
5. How do I Apply for Old Age Security?
Old Age Security pension begins the month after turning age 65. But naturally the Government of Canada wants a bit of lead time to get this sorted out for you. So you should expect to start planning for OAS shortly after you turn 64.
- The month after age 64 you may have received a letter saying that you were eligible for OAS and that you were automatically enrolled. If you wish to receive OAS at age 65, you don’t need to do anything. If you wish to defer payment, you must follow the instructions in the letter
- The month after turning 64 you may have received a letter saying that you could be eligible for OAS. You need to apply, following the instructions in the letter.
- If you do not receive a letter about OAS the month after turning age 64, and you wish to start receiving it when you turn 65, you must apply.
- If you are already over age 65 and wish to receive OAS now, apply right away. They may be able to give you some retroactive payments, but you don’t want to lose out on benefits.
- If you were unable to apply due to medical reasons, contact Service Canada to fill out the Declaration of Incapacity form.
6. Should I Defer Old Age Security?
You can begin taking OAS at any point between your 65th and 70th birthdays. If you defer OAS, you get an additional 0.6% for every extra month that you wait. This means you get an additional 36% every month if you wait until age 70.
Should you defer Old Age Security? This is a hard question to answer, and the right decision needs to be based on your own situation. However, here are some things to consider:
- The state of your health.
- Whether you are still working full-time, part-time, or fully retired.
- Whether your taxable income is over $75,910 (the point at which the government starts to claw back some of the benefit) or over $126,058 (where benefits are fully clawed back).
- If you need the OAS income to cover your expenses.
- If you plan to spend more money in the early years of retirement, such as for big vacations.
- Whether you have lived in Canada long enough to get the full benefits.
- If you need a little more time to meet the legal resident requirements
- After age 71 you will be required to make annual withdrawals from your RRSPs, which are taxable income.
- The Guaranteed Income Supplement (GIS) is only available to those receiving OAS. I will write more about the GIS soon.
- Will you need to withdraw too much from your RRSP in the years between ages 65 and 70 if you delay OAS.
What do Other Experts Say?
You may decide to defer Canada Pension Plan (CPP) and not defer OAS, or vice versa. Jonathan Chevreau at MoneySense writes that for him, it makes sense to take OAS right away and defer CPP. In his situation, he anticipates that OAS will be clawed back after age 70, so he’d better take it while he can. In addition, there’s a bigger benefit to deferring CPP than OAS.
“Your situation may differ but my own financial planner believes I should defer CPP but take OAS as soon as it’s on offer at age 65”Jonathan Chevreau, MoneySense
Ed Rempel writes that the break-even point for OAS deferral is age 83. That is, if you expect to live beyond age 83, you’re better off deferring it. However, as he points out, there are differences in personal situations. He gives 7 “real life” examples, and while 4 suggest that it’s beneficial to delay CPP, only 2 show the same for OAS.
Ultimately, the decision to take Old Age Security right at age 65 or defer it for months or years, is based on individual situations. I would suggest that you consult a fee-for-service financial planner for advice on this in conjunction with your whole financial picture.
Final Thoughts on OAS
Old Age Security is a great perk of living in Canada for many years. This pension can really help to boost the incomes of people age 65+. But at under $15,000 per couple (if you don’t defer benefits), it does not get you over the poverty line.
Moreover, it is rare for couples to pass away together. When the first half of a couple passes away, it generally means the loss of their OAS to the survivor. Remember to plan your finances for this likely loss of income at some point.
Old Age Security is indexed to inflation, so you can count on its purchasing power not diminishing over the years until you retire.
Please note that the information here and elsewhere on my blog is for education and entertainment purposes only. Any examples are for demonstration purposes and may not apply to your personal situation. You should consult the Government of Canada for current Old Age Security policies.