OAS deferral strategies

This year’s Federal Budget will be remembered for raising the qualification age for OAS from 65 to 67.

Somewhat lost in the shadow of that headline was another OAS change that will allow an election to defer the pension, akin to how the Canada Pension Plan may be accelerated or deferred. With the new rule coming into effect in 2013, it may be a good idea for soon-to-be retirees to get familiar with the concept and arithmetic that lies ahead.

Deferral arithmetic

Beginning July 1, 2013, clients don’t have to draw their OAS pensions as soon as they reach 65. A pensioner may defer the payment beyond his 65th birthday for up to five years.

For each month deferred, a premium of 0.6% will be added to the pension, which works out to 7.2% for one year, or as much as 36% if the deferral is for the full five years (see “CPP post-65 premium comparison,” this page).

In Q4 2012, the full OAS pension is about $6,540 annually (indexed quarterly). If a client defers to age 70, the pension would be $8,894, though he wouldn’t have received any payments in the interim.

So what’s the ideal age to begin OAS? I considered the crossover point—the age someone has to live until it’s wiser to delay taking CPP until age 65—which can be misleading. Still, it appears that a 65-year-old who expects to live past age 82 will draw more OAS dollars by deferring to age 70.

CPP Post-65 premium comparison

While the new OAS monthly premium is 0.6%, the upside monthly premium for the CPP is transitioning to 0.7% by 2013 (currently 0.64% in 2012). Both CPP and OAS allow up to five years deferral. Though these are distinct programs, the 2012 Federal Budget stated:

“The adjusted pension will be calculated on an actuarially neutral basis, as is done with the CPP. This means that, on average, individuals will receive the same lifetime OAS pension whether they choose to take it up at the earliest age of eligibility or defer it to a later year.”

We’re left to wonder why there is a difference in the premium rates for the two programs, or whether there is an actuarial difference between a CPP pensioner and an OAS pensioner.

Coordinating for clawbacks

If a client has known health issues that can affect his life expectancy, it’s best for him to begin the OAS pension as soon as it’s available. However, this is where advisors must provide value by exploring the variety of income sources that are available.

One issue that often comes up is the potential for an OAS clawback if income exceeds the relevant threshold—$69,562 in 2012. Even at lower income levels, other clawbacks may apply, including federal and provincial age credits and the GST/HST credit. For example, the clawback range for the federal age credit runs from $33,884 to $78,684, adding 2.25% to one’s effective tax rate. (The credit rate is at the lowest federal bracket of 15%, and so is the clawback rate. The taxpayer loses 15% of 15%, or 2.25%.)

It’s worth analyzing the effects of deferring OAS pension in favour of earlier or larger RRIF withdrawals. Potential benefits include:

• People not yet drawing any RRIF income can claim the pension credit on the first $2,000 of such income;
• During the deferral period, the clawback won’t apply because there is no OAS pension;
• The OAS pension will be augmented for each month deferred;
• The size of the RRIF will be reduced, so there’s a lower value that’s subject to the post-71 minimum withdrawals—a key culprit of clawbacks;
• Even if the OAS clawback applies later, the pension itself will be larger, meaning the upper threshold for full clawback will be at a much higher income level.

Doug Carroll, JD, LLM (Tax), CFP, TEP, is vice president of tax and estate planning at Invesco Canada.