For many Canadians, the Old Age Security (OAS) pension provides an important source of retirement income. One common question is whether it makes sense to defer OAS payments. There is also a major red flag to consider if you choose to defer.
Here is what you need to know.
Prefer to watch the video?
How OAS Eligibility Works
To qualify for OAS, you must have lived in Canada for at least 10 years after turning 18. To receive the maximum payment, you need at least 40 years of Canadian residency after age 18.
Unlike the Canada Pension Plan (CPP), OAS payments are not based on employment history. They are based solely on residency. Most Canadians who qualify receive the maximum payment.
Currently, the maximum OAS payment is $685.50 per month, starting at age 65.
Why Some Retirees Defer OAS
You can defer your OAS to receive a higher monthly payment. Payments increase by 0.6 percent for each month you defer, up to a maximum of 36 percent at age 70.
For example, deferring by one month would increase your payment to just over $689. Deferring for a full year would raise it by 7.2 percent. If you defer until age 70, your payment would be 36 percent higher than at age 65.
Here are two reasons you might consider deferring:
- You are still working. If you are earning income, you may be in a higher tax bracket. Starting OAS while still working could result in higher taxes on your pension. Waiting until retirement may allow you to keep more of your OAS payments.
- You want to protect against longevity risk. Many retirees worry about outliving their savings. Deferring OAS gives you a higher guaranteed income later in life. Some retirees choose to spend more of their personal savings between ages 65 and 70 to allow for a larger OAS income from age 70 onward.
The Major Red Flag of Deferring OAS
There is one key drawback to deferring OAS. The OAS pension does not include survivor benefits.
If you pass away, your spouse will not continue to receive any portion of your OAS payments. This is important to understand when planning your retirement income.
Consider this example. John and Mary decide to defer their OAS pensions to age 70. They spend down their RRSPs and TFSAs in the meantime, expecting a higher base income once they start OAS. Unfortunately, John passes away shortly after starting his pension. Since there are no survivor benefits, Mary does not receive any of John’s OAS. Their plan to secure a higher lifetime income did not work out as intended.
Final Thoughts
Deferring OAS can be a smart move in some cases, especially if you want to protect against longevity risk or avoid higher taxes while still working. However, it is important to understand that there are no survivor benefits. For some couples, it may be better to start OAS earlier and preserve personal savings.
If you would like help creating a retirement income plan that fits your goals, visit our website and book an appointment with us.
