In Canada, the retirement income system is comprised of two key benefits: the Canada Pension Plan (CPP), and the Old Age Security (OAS) pension. Both benefits have been around for decades, providing Canadians with a fundamental level of income security in their retirement years. In this article, we’ll explore the ins and outs of the Old Age Security pension.
By the time you’ve finished reading, you should have a good understanding of the OAS, including who is eligible, how the benefit is calculated, as well as its limitations. I’ll also share a few tips on how to maximize the OAS benefit you receive. First, let’s take a quick look at the history of this federal government pension plan.
History of the OAS
The first old age pension plan in Canada was established in 1927, providing a means-tested income for Canadians over 70 with little to no income. In 1952, the Old Age Security Act came into force and required the federal government to share the cost of provincially-run, means-tested old age benefits.
A number of years later In 1965, the age of eligibility was reduced to 65, from age 70, a change that was phased in over a 5 year period. Fast forward to today, the OAS exists in its current form, along with a few added benefits, including the Guaranteed Income Supplement (GIS), as well as an age and survivors allowance.
Who is Eligible for the Old Age Security Pension?
Unlike the Canada Pension Plan (CPP), OAS benefits are not tied to your employment history. In other words, you can collect OAS at age 65 regardless of whether or not you’ve ever been employed. For Canadian residents, the following criteria must apply:
- Must be at least 65 or older;
- Lived in Canada for at least 10 years since you were 18;
- Be a Canadian citizen or resident when your OAS application was approved
For Canadians living outside of the country, the rules differ slightly. The same age requirement exists (65 or older). In addition, you must have lived in Canada for at least 20 years since you turned 18 years of age, and you must have been a Canadian citizen or resident immediately prior to leaving Canada.
Some Canadians who have lived outside of Canada may not meet either of the above requirements. That said, if you’ve worked for a Canadian employer outside of Canada, you may be able to include this time in your years of Canadian residence. In order for this to be considered, you must have returned to Canada within 6 months of ending your employment or turned 65 while you were still employed.
How is the OAS Calculated?
You’ll be eligible for the full OAS pension amount if you lived in Canada for at least 40 years after you turned 18. If not, you’ll receive a reduced benefit. A partial OAS benefit is calculated as follows: 1/40th of the full pension for each year you lived in Canada after the age of 18.
For example, let’s say you lived in Canada for 30 years as an adult. In this case, you may qualify to receive 75% of the full OAS benefit, for having lived in Canada 30 out of 40 years. Other factors, such as your annual income, can also impact the amount of OAS benefit you will receive. I’ll get into this in more detail a bit later.
What is the Maximum OAS Benefit?
The maximum Old Age Security benefit for an individual is $613.53, for the 4th quarter of 2019. Benefits are adjusted quarterly (January, April, July, October) every year to account for changes in the Consumer Price Index (cost of living). The maximum OAS benefit does not include additional benefits, such as the Guaranteed Income Supplement, which is available to qualifying, low-income Canadians. Let’s take a closer look at the Guaranteed Income Supplement.
Guaranteed Income Supplement (GIS)
The Guaranteed Income Supplement is a non-taxable income benefit which is paid to low-income OAS recipients living in Canada. To qualify for the GIS, you must meet all of the following criteria:
- You must be receiving the OAS;
- Your annual income must be lower than the maximum annual threshold;
Currently, the maximum annual (income) threshold is set at $18,599. What this means is that if your income (not including your OAS benefits) is $18,600 or higher, than you won’t qualify for the GIS. On the other hand, if you received the maximum OAS benefit, and had no other income, then your monthly GIS payment would be $916.38. Keep in mind, CRA calculates your qualifying income each year, so your GIS could change from year to year if your income level changes.
Other OAS Benefits
In addition to the Guaranteed Income Supplement, the government offers two other OAS related benefits that you may qualify for. The first is an allowance for low-income individuals between the ages of 60 and 64. If your spouse or partner receives the GIS, you may be eligible for an allowance. Lastly, the survivor’s allowance provides additional income for widows who are between the ages of 60 and 64.
When to Apply For Your Old Age Pension
You can apply for the OAS pension the month after your 64th birthday. This gives the CRA enough time to calculate the OAS benefit you’ll receive when you turn 65. OAS payments are paid in monthly installments, on the third business day prior to the end of the month. Let’s use October 2019 as an example. October 31st lands on a Thursday, so both CPP and OAS will be paid on Tuesday, October 29th, the third last business day before the end of the month.
Understanding the OAS Clawback Threshold
While OAS benefits are not dependent on the number of years you were employed, the benefit you receive will begin to be clawed back once you exceed a certain annual income. For the 2019 tax year, any income exceeding $77,580 will be subject to a clawback, in 2020/2021. This is known as the OAS recovery tax. Benefits continue to be clawed back for income levels up to $126,058, at which time your OAS benefits would be reduced to zero.
The recovery tax is calculated as a 15% penalty on all income that exceeds the minimum clawback threshold ($77,580, October to December 2019), until the OAS benefit is reduced to zero (income of $126,058). For example, if your annual income was $90,000 in 2019, you would pay a tax of 15% on $12,420 ($90,000-$77580 = $12,420), which would be $1,863. Your OAS benefit starting in July 2020 and ending in June 2021 would be reduced by $1,863, or $155.25 per month.
Deferring Your Old Age Security Pension
Did you know? As of July 2013, you can defer your OAS benefits for up to 5 years after the date in which you become eligible. The advantage here is that a deferral will result in a higher eventual monthly payment, as much as 36% higher, if you delay receiving your OAS until age 70. This is an option to consider if your income will be higher than the clawback threshold, resulting in a reduced OAS benefit.
Ways to Maximize OAS Benefits
Here are a few tips on how you may be able to maximize the OAS benefits paid to you. As you’ll see, all of these strategies involve minimizing your taxable income, to maximize the amount of OAS you will qualify for. As a reminder, OAS benefits begin to get clawed back as soon as your taxable income rises above $77,580.
- Income split. Talk to your accountant about opportunities to split income with your spouse. The goal here is to keep income for both spouses under $77,580, to ensure there is no OAS clawback.
- If you’re drawing income from personal investments, it might be wise to defer RRSP or RRIF withdrawals, in order to avoid increasing your taxable income. Instead, look to pull from your TFSA or non-registered plans first, as they won’t affect your income level.
- When you do your taxes, take advantage of any available deductions, in order to reduce your taxable income. If you’re over 65, but not yet 71, you may even want to consider making RRSP contributions if needed. Of course, always consult a tax professional as everyone’s situation is different.
- Find ways to lower income from your investments. Investments that pay dividend income, or realize capital gains ie. dividend-paying stocks, ETFs, some mutual funds, are more tax-efficient than investments that only pay interest income ie. term deposits, GICs. Shifting towards tax-efficient investments will reduce your taxable income, while at the same time keeping more money in your pocket.
Final Thoughts on the Old Age Security Pension
For generations, Canadians have been able to rely on Old Age Security to provide them with a basic retirement income when they reach the age of 65, while additional benefits, like the Guaranteed Income Supplement, offer a much needed safety net for very low income Canadians. Remember that the CPP and OAS alone will not be sufficient to fund your retirement. I highly recommend that you spend time doing your research on the OAS, to figure out the benefit amount that you can expect to receive. From there, assess your other retirement income options, such as an employer pension plan, and savings from RRSPs and your Tax Free Savings Account. Each one will be key to ensuring a comfortable retirement.