A few weeks ago, we reviewed the recent changes in the Canada Pension Plan rules and how they affected choices people might make about taking their CPP early, or deferring to after 65. These choices have always been available with CPP, but the penalties and rewards for advancing and delaying now make it more lucrative to delay.
Today's article is about Old Age Security (OAS) and changes introduced in the 2012 Federal Budget, which now give you similar choices for OAS.
I would be remiss not to mention that some OAS changes are being imposed upon us. For people born after April 1958, the normal start age for OAS will gradually be pushed back, to age 67 by 2023. More information on this can be found at www.servicecanada.gc.ca.
The "new" choice people get to make is to defer their OAS even longer in return for a higher benefit for the rest of their lives. The maximum OAS benefit for a person age 65 in the first quarter of 2013 is $546.07 per month.
Using the same formula as CPP, each month of deferral will increase the regular benefit by 0.6 per cent. This works out to 7.2 per cent per year, for up to 36 per cent by deferring for the full five years that is allowed.
In considering this choice, the first question is the same one a person would ask if making the decision about CPP. Unfortunately, that question is, "Exactly how long will I live?"
(If you knew that answer, then the calculation would be fairly simple. But we usually don't.)
Most people will choose to take their OAS as soon as they can. This is partly the "bird in the hand" principle, reinforced by the usual desire and ability to spend more money in the early years of retirement.
That logic makes sense. The decision to take OAS as soon as one is eligible will seldom be a bad choice. A person has to live past roughly age 80 to make deferring one year make sense, and roughly another year to make each subsequent year of deferral worthwhile.
In other words, if you are eligible to take your OAS at 65 and you delay instead until 67, the break-even point is around age 81. If you live longer than that, then it may have been a financially better decision for you to defer your OAS.
However, if you are lucky enough to have that theoretical calculation work against you, it's because you lived longer than you expected, and you could consider that its own reward. As well, you would have had more spendable cash flow in the early years of retirement.
The exception to this general rule is in a situation where a 65-year old person's net income is above $71,000, but they expect that income to decrease within a few years.
This is the magic figure above which you get to participate in the "Social Benefits Repayment" program, more commonly known as the OAS Clawback. For every dollar of net income above $70,954 in 2013, 15 cents of OAS is either withheld from payment or clawed back when the tax return is filed.
With the combined federal and Manitoba tax rate of 39.4 per cent on taxable incomes between $67,000 and $87,123 and the additional 15 per cent clawback on OAS, the effective tax rate is really over 54 per cent, and higher on incomes above $87,000.
If that is your situation, then deferring OAS might make sense, IF there is some reason to expect income to drop in the future. Most people are actually in the opposite situation, as they are forced to take taxable income from RRIF or LIF after age 71, pushing them up a tax bracket or two.
So, for most people, taking OAS right away makes sense.
An alternative is to wait and see. You can delay for up to 11 months and request a lump-sum catch-up amount instead of a higher lifetime benefit. In all cases, apply six months in advance of your desired start date.
-- -- --
There has been some valuable publicity lately about the fact most Manitoba publicly-traded companies are very under-represented by women on their boards of directors.
To celebrate progress where it occurs, I am told by the chair of the Manitoba Blue Cross Board of Directors that 38 per cent of their members are women.
Progress is good.
David Christianson, BA, CFP, R.F.P., TEP, is a financial planner, advisor and Vice President with National Bank Financial Wealth Management, and author of the book Managing the Bull, A No-Nonsense Guide to Personal Finance.