Canadian workers have lots of options when they’re ready to retire, including Old Age Security (OAS) payments. But taking your payments as soon as you reach the age of eligibility might not make sense for you if you still work or draw a comfortable private pension. In those instances, deferring your OAS benefits can help bolster your retirement income down the road. By deferring these benefits for as long as possible, you can even increase the monthly payments you receive.
Advantages of Deferring OAS Benefits
As of 2018, you become eligible for OAS benefits at age 65, but for every month you defer the benefits, your payment increases by 0.6%. For instance, if you have a $570 monthly OAS benefit and you defer payment for three months, you receive a 1.8% increase. This results in $10.26 extra per month. This means if you defer your payment for all five of the allowable years (until you turn 70), you can enjoy a monthly benefit increase of up to 36%. (That’s the 0.6% increase multiplied by 60 months). If you deferred your $570 payment for five years, you boost your benefits by $205 per month, giving you a monthly OAS benefit of $775. Once you begin receiving payments, the five-year deferral results in $2,460 extra in your pocket every year.
Side Effects of OAS Deferral
When making your OAS deferral decision, keep in mind that you lose your eligibility for the Guaranteed Income Supplement (GIS) when you defer your benefits. This also means your spouse can’t collect GIS allowance benefits during this time. The GIS program applies to those with incomes lower than the maximum annual threshold, and the Canada Revenue Agency (CRA) reviews your eligibility for this program every year based on your federal Income Tax and Benefit return.
If you make more than $74,788 annually, you may have to return some or all your OAS benefits to the CRA. To calculate your income from this threshold, the CRA includes your net income before adjustments, minus payments you receive from the Canada Child Benefit (CCB) program or your Registered Disability Savings Plan (RDSP) and plus any repayments you made to the CCB or RDSP.
Affording the OAS Deferral
While turning down immediate funds might not pay off in the short term, the long-term advantages in terms of extra income outweigh the disadvantages. In some cases, this might mean living below your actual means while you wait. Of course, if you have interest income, you can opt to defer retirement until age 70 while living off your earnings. Alternatively, if you have other retirement savings, you can tap into those amounts during the deferral, and you can also use your Canada Pension Plan (CPP) benefits, though deferring those payments has advantages too. Ultimately, you may want to work out your finances so you withdraw more from your savings at age 65 to 70. You can then reduce your withdrawals after age 70 while enjoying your larger OAS benefit.
How to Defer OAS Benefits
The month after your 64th birthday, you should get a letter from Service Canada concerning your selection for automatic enrollment in OAS and, if you qualify, also GIS. This means you don’t have to apply for your benefits so long as the information in your letter proves accurate. If you want to defer your OAS, GIS, or both, you can do so online via your My Service Canada account.
If you don’t get a letter from Service Canada the month after your 64th birthday, then the government didn’t choose you for automatic enrollment. At that point, OAS deferral is easy — simply don’t apply for your benefits when you turn 65. Instead, wait until you’re ready to start drawing your monthly entitlement, and then submit the Application for the Old Age Security Pension to Service Canada. You can indicate when you want your benefits to start on that form.
If you already receive your OAS pension, you can cancel it within six months of the day it starts to take advantage of the deferral benefits, and you then have six months to repay the benefits you received. Once you repay the amount you drew, you can defer collecting benefits until you’re ready.
In addition to considering deferring your own payments, you may want to talk with your clients about the benefits of OAS deferral. As their accountant, your help with their retirement planning can potentially set them up better for future success. With that in mind, QuickBooks Online Accountant offers powerful tools for accounting professionals. Sign up for free.