When is the best time to take CPP and OAS?

There are several factors to consider when helping a client determine when to draw their CPP and OAS benefits, a tax and estate planning expert suggests.

Frank Di Pietro, assistant vice-president of tax and estate planning with Mackenzie Investments, said advisors should consider a client’s life expectancy, whether they’ll consume or invest the payments, their cash flow needs, and more.

If a client’s life expectancy is lower, for example, it makes more sense for them to take their CPP and OAS benefits earlier, and vice-versa if their life expectancy is higher, Di Pietro said at an RBC Wealth Management webinar Tuesday.

CPP monthly benefits are reduced if you take them before age 65, and increased if you take them after age 65, up to age 70. OAS monthly benefits increase if you take them after age 65, up to age 70.

For example, someone who is 65 and entitled to CPP of $1,254 per month would only receive about $800 a month if they began drawing at age 60. “You take it earlier, but you receive a lower monthly value,” Di Pietro said.

A client’s cash flow needs are another factor in determining when they should take their benefits. “There are many individuals who, once they hit age 60, they may need that extra source of income to fund retirement expenses. If that’s the case, then your decision could be fairly straightforward,” Di Pietro said.

“You also want to think about what you plan to do with that CPP retirement benefit. Do you need it for your retirement income? Or, is there an opportunity for you to take that benefit and invest it?” he said.

For example, Di Pietro presented an example of a CPP benefit received at age 60 and age 65, and invested in a diversified portfolio earning an after-tax return of 2.5%.

The cumulative benefits of taking the CPP at age 65 and spending it maxed out at about $400,000 at age 100, while the benefits of taking CPP at age 60 and spending it maxed out below $300,000 at age 100. (The benefits of taking CPP at age 60 and investing it at 2.5% maxed out around $350,000 at age 100.)

However, up to about age 74, the cumulative benefits of taking CPP at age 60 and spending it outweighed the benefits of waiting until age 65.

And up to about age 78, the cumulative benefits of taking CPP at age 60 and investing it outweighed the benefits of delaying CPP and spending it. (This “breakeven age” rose to age 80 at a 3% rate of return, and age 83.5 with a 3.5% rate of return.)

When it comes to income-tested benefits like OAS, if a client earns too much income, the benefit is clawed back. This clawback begins at $79,845 for the 2021 tax year. “You want to be mindful of your decision to take CPP on those income-sensitive benefits,” Di Pietro said — if drawing CPP puts the client above the threshold, doing so may not be prudent.

If your client is receiving a CPP disability benefit, Di Pietro noted that the benefit will automatically convert to a CPP retirement pension at age 65.

Clients are entitled to their full CPP and OAS benefits at age 65, but OAS cannot be drawn any earlier than age 65, and CPP cannot be drawn any earlier than age 60. Clients must draw their CPP by age 70, and there are no financial advantages to drawing OAS after age 70.

CPP payments fall by 0.6% for each month they are taken prior to a person’s 65th birthday, to a maximum of 36%. Conversely, CPP payments increase by 0.7% for each month they are taken after a person turns 65, to a maximum of 42% at age 70. OAS payments rise by 0.6% for each month they are taken after age 65, to a maximum of 36%.