Should you start OAS if you are still working?

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Not retired yet? Wondering about applying for Old Age Security? Here are the things to consider first.

Should you start OAS if you are still working?

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I’m turning 65 next month and I’m wondering if I should apply for my OAS this year? My wife retired at age 60 last year and has a full pension from her previous employer. I am still working full time and plan on working for another two years, I will also be receiving a full pension at retirement. Our combined gross income is $107,000 this year, our home is paid off and we have $500,000 in savings. Do you think it would be advantageous for me to start my OAS this year or should I defer collecting it till I retire? 
—Charles

How is OAS paid? Does it matter if you’re still working?

Old Age Security (OAS) pension is paid based on an applicant’s years of residency in Canada. If you have 40 years of Canadian residency since the age of 18, you will receive the full pension at age 65, which is $642 per month as of the first quarter of 2022 ($7,707 annualized). If you have less than 40 years of residency, you can still receive a prorated pension. 

You can start your OAS from the ages of 65 and 70. For each month you defer your pension after age 65, Charles, it increases by 0.6%. That would mean a 7.2% increase per year of deferral. Each quarter, the pension is also adjusted by the rate of inflation, so with a target of 2% for the Bank of Canada, OAS might reasonably increase by 9.2% per year with each year of deferral. 

To be clear, that does not mean there is a 9.2% return to defer OAS. You get a higher pension if you defer, but you get less years of payments. If you defer your pension to age 70, you would need to live to age 81 to receive more cumulative payments than starting at age 65. 

Things to think about before starting or deferring OAS 

Value of OAS

Because of the time value of money, where a dollar today is worth more than a dollar tomorrow, you might need to live into your mid-80s to be better off deferring OAS to age 70 depending on the assumptions used. That is, if you can invest your OAS, or draw down less on your existing investments because you are receiving OAS, that has a value that needs to be factored into the breakeven calculation. 

Your age

Your life expectancy is a key factor in deciding whether to defer your OAS. A 65-year-old has a 50% chance of living to age 90. So, most 65-year-olds should probably consider deferring their OAS pension. 

If you’re working

In your case, Charles, you are still working and mention your combined family income is $107,000. OAS is a means-tested government benefit that is reduced if your individual 2022 income exceeds $81,761. 

So, depending on what your income is this year, if you apply for OAS, you might lose some of it. If your income exceeds the pension recovery tax threshold, you pay back 15 cents of OAS per dollar of income over $81,761 as tax on your tax return. 

Do you really need it right now?

It sounds like you may not need your OAS urgently if you have $500,000 of savings with your wife, Charles. If you need OAS, especially if your income is relatively low, applying for OAS at 65 may be advantageous. This is because there is an associated Guaranteed Income Supplement (GIS) for low-income singles and couples who begin their OAS pension. 

If you defer your OAS and you die young, your workplace pension will presumably have a survivor benefit payable to your wife to mitigate that risk. If your income is not going to be subject to OAS clawback, a primary consideration for deferring OAS is your own life expectancy. A secondary consideration is your existing pension income. Because you already have a pension, Charles, arguably you are already well protected against the risk of living too long. That is, if you live to 110, you already have a pension that will continue to provide for your retirement income. Someone without a pension should more strongly consider deferring their OAS pension, as well as the other government pension – the Canada Pension Plan (CPP) retirement pension. 

In summary, Charles, there are a few considerations for your OAS timing but ultimately it is a personal decision. The vast majority of applicants start their pension at age 65. I suspect it is because they get an application in the mail and figure they are supposed to fill it out and start their pension though, and not necessarily based on considering all factors. 

Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto, Ontario. He does not sell any financial products whatsoever.

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