Subscribers to our site will know we’re still many years away from taking our Old Age Security (OAS) benefits. That said, just like the Canada Pension Plan (CPP), Old Age Security (OAS) can be a modest retirement income source. So, it’s good to get to know the ins and outs of this benefit to use this income stream effectively and efficiently.
What is OAS?
How does OAS work?
How much income might you expect from OAS?
We’ve got those questions above covered and much more in today’s post!
Old Age Security 101 – What is OAS?
Like our previous post that discussed the many ins and outs about The Canada Pension Plan (CPP), Old Age Security (OAS) is also a retirement pension, that is paid monthly. The major difference is that OAS is completely government-funded by general tax revenues and the longer that you’ve lived in Canada, the more you get (subject to the conditions described below)! It’s a taxable benefit that is designed to provide some retirement income security for life.
You can receive OAS if you are aged 65 and older. In some cases, Service Canada will be able to automatically enroll you for the OAS pension. In other cases, you will have to apply for the Old Age Security pension. Service Canada will inform you if you have been automatically enrolled.
Unlike the Canada Pension Plan (CPP), your employment history is not a factor in determining eligibility.
That’s great news if you both live and retire in Canada, or abroad!
In fact, you can receive OAS benefits even if you have never worked or are still working.
If you are living in Canada, to receive OAS you must:
- be 65 years old or older;
- be a Canadian citizen or a legal resident at the time we approve your OAS pension application; and
- have resided in Canada for at least 10 years since the age of 18.
If you are living outside Canada, to receive OAS you must:
- be 65 years old or older;
- have been a Canadian citizen or a legal resident of Canada on the day before you left Canada; and
- have resided in Canada for at least 20 years since the age of 18.
Interestingly, Canadians working outside Canada for Canadian employers, such as the Canadian Armed Forces and banks, may have their time working abroad counted as residence in Canada. Check out those working abroad and social security agreement details about OAS on this Government of Canada page here.
Generally speaking, under certain conditions, spouses, common-law partners, dependents, and Canadians working abroad for international organizations may also count time spent abroad as residence in Canada.
Here are some other fast facts about OAS you need to remember…
How does OAS work?
- OAS is a flat rate pension benefit. We’ll share “how much” you get in a bit.
- OAS is considered one of the basic building blocks or tiers of Canada’s retirement income system.
- Provided you meet residency retirements, it is a flat rate monthly benefit that goes to everyone at age 65 or older (you can defer this benefit).
- There is no requirement to stop working in order to receive OAS.
- To get benefits, you must have lived in Canada for 10 years after age 18. To get full benefits, you must have lived in Canada for at least 40 years after age 18. Those who can’t meet the 40-year residency requirement get a pro-rated benefit.
- OAS is paid to individuals and does not depend on participation in paid employment nor on the income of a spouse or partner.
- OAS is clawed back from individuals whose income exceeds certain thresholds. Like the rest of our progressive tax system, clawback incomes are adjusted each year for inflation.
- OAS is funded from general tax revenues, it is not a contributory plan like CPP is.
- In fact, Old Age Security is the Government of Canada’s largest pension program.
- Benefits are also indexed for inflation, based on price increases. While CPP benefits are indexed annually, OAS benefits are indexed quarterly.
Should you delay OAS and get a higher payout?
You should know you can receive a higher Old Age Security pension amount for each month you decide to delay your first payment.
While you can receive your first Old Age Security pension payment the month after you turn age 65, you can receive a higher amount for each month you decide to delay your first payment.
You can delay payment of the Old Age Security pension for up to 60 months (5 years) after you are 65 – up to age 70. The longer you delay, the larger your pension payment will be each month.
Some Canadians don’t know this fact: by voluntarily deferring OAS benefits until age 70, Canadians can increase their OAS payments by 36%.
At Cashflows & Portfolios, we believe it makes sense, in most cases, to take OAS at age 65 and defer CPP where possible to age 70.
Why?
CPP payments have a benefit bump of 42% if Canadians wait until age 70 to take their CPP benefit (versus 36% for OAS benefits starting at age 70). So, all things being equal it makes more sense to defer Canada Pension Plan versus Old Age Security.
At Cashflows & Portfolios, here is a recap of which major government program to defer and why:
Essentially, you take CPP or OAS or both as early as possible, because:
- You need the money
- You have reason to believe that you have a shorter-than-average life expectancy.
You may consider taking CPP or OAS or both as late as possible, because:
- You don’t need the money.
- You have every reason to believe you have a longer life expectancy.
- You are not concerned about leaving an estate – you can enjoy/spend your personal assets first.
- You don’t have a reliable defined benefit pension with full indexing, so CPP and OAS are integral to your inflation-protected, fixed-income financial well-being!
Of note, if you are eligible for the Guaranteed Income Supplement (GIS), there is no advantage in delaying your first payment. We will discuss GIS in future posts!
How much income might you expect from OAS?
“It depends”!
Based on this link, you will receive this amount in OAS pension.
Remember, OAS benefits are reviewed in January, April, July and October each year, and adjusted to reflect increases in the cost of living as measured by the Consumer Price Index. Your monthly payment amount will not decrease if the cost of living goes down.
You will however have to pay tax on the Old Age Security pension payment.
I’ve heard about the OAS clawback, what is that?
OAS payments are taxable income and this income is subject to recovery tax (re: the “OAS clawback”) if your individual net income is beyond a particular threshold.
This link is updated for the OAS clawback amount each year – so bookmark this post!
Seniors must pay some or all of their OAS income back if their annual income is higher than this threshold.
What is Old Age Security (OAS) Summary
There’s still a lot more ground to cover actually when it comes to the OAS.
What we want you to take away from this post is, like CPP, OAS remains a very important income stream in our retirement planning toolbox. While OAS monthly payment may not be as generous for some, as much as CPP, any employment-based pension plans, or any personal retirement savings plans such as TFSAs, RRSPs, and other investment accounts, it is a government security benefit all the same.
So, while government-administered plans like OAS are not designed to be your sole source of income during your retirement, it can help you enjoy a more comfortable retirement.
Given the timing of when to take OAS can be an important decision, including OAS clawback considerations for higher net-worth individuals, we believe OAS benefits should be carefully analyzed as part of any retirement income projections to deliver a secure financial future, including tax efficiency.
A reminder, if you haven’t already subscribed, please do and download our FREE cashflow spreadsheet to see where your money goes and see if it lines up with what you’d expect!
Further Reading:
Check out our comprehensive posts on the following subjects:
Need any support or help with deciding on when to take OAS or CPP?
Knowing the best age to start taking OAS in the context of your entire financial picture can be tricky. If you need some help in solving your retirement decumulation puzzle (i.e., how to efficiently withdraw from your retirement accounts), we’re here to help.
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Disclaimer: Any information shared on our site (“Cashflows & Portfolios” https://cashflowsandportfolios.com/) or related to our site, is for awareness and illustrative purposes only.
In the realm that it’s a good problem to have, when a person has a high amount of dividend income, this can affect OAS clawback. As dividend income is grossed up by 38%, and this is the income used to determine if a clawback is then enacted. The dividend tax credit is applied after I.e. the income used for calculating OAS is before the tax credit is applied.
I know Mark endorses dividend income as a great path to financial independence, and I do as well. However when dividend income after the gross-up is approaching the amount where a clawback of OAS will kick in and then combine it with any other income, there will be OAS clawback. As I said, a good problem, I guess. Nevertheless the gross up for dividend income is a topic that needs a bit more explanation with respect to OAS and clawback.
We’re totally with you Jeff – re: all things considered, in retirement, my goodness, OAS clawbacks are a GREAT problem to have in retirement. I’ve always said I will welcome a small set of tax headaches like that in retirement compared to other ailments!
I think that’s a good idea for a future post on this site. I know I (Mark) have covered the DTC (Dividend Tax Credit) on My Own Advisor but given this site has more an educational focus for aspiring retirement plans and case studies, re: OAS, potentially to your point an area to explore in the future.
Thanks for the content idea 🙂
CAP
Further to Jeff’s comment regarding the 38% gross up on dividend income that could place you into OAS clawback territory. One strategy to consider (if possible). As you are approaching retirement or if already in retirement, especially if you have a significant percentage of your income being derived from dividends. Have your “quality” dividend shares transferred in kind into your TFSA account (assuming you have the contribution room). You’ll have to pay tax on any gains that should have accrued. However, while capital gains are not “taxed” as favourably as dividends it may avoid or at least mitigate any OAS clawback. Also, going forward all future dividend income is tax free. Be aware that this must be done after considerable thought. This is not a recommendation for any dividend stock that has had a capital loss. That is why I emphasize that they be “quality” dividend paying stocks. If you have stock’s that have suffered a loss there is a different strategy to consider. Before implementing any strategy confer with both your financial advisor and your tax advisor.
Indeed Mark – folks can have some “quality” dividend shares transferred in kind into your TFSA account from non-reg. That move however could incur a capital gain as you know so best to understand the tax implications first.
I (Mark) might slowly move some assets from non-reg. to TFSA over time for those reasons; re: more tax-free juicy dividend income.
Thanks for your comment and contributions to the site.
CAP
CAP: thanks for providing this info.
Similar to Jeff’s comment, if I was receiving a company pension of $100,000 a year, but utilized income splitting, such that my wife and I were paying taxes on $50,000 each, would I be subject to OAS clawback due to my pre-splitting $100,000 income?
Hi Bob!
In 2021, the OAS clawback threshold is around $79,800, so net income below that threshold would be safe from the OAS clawback. In your case, if you only reported $50k net income after income splitting, then you would be in the safe zone. However, note that other income like from CPP, non-reg dividends/interest and RRSP withdrawals would start pushing your net income upwards. Those with large RRSP balances may face clawback when they turn 72 (convert to RRIF) and forced to withdraw 5.4% of their account balance. In the big picture though, it’s a good problem if your account balances are so large that you are getting some OAS clawed back!
All the best and let us know if you have any other questions.
Many thanks for the quick response. That was most helpful.
Bob
If I am making or earning almost $80K a year, I have no problem with my OAS being reduced .I’m assuming someone with a lower income would benefit from my clawback.
Well put Matt and we believe no senior making $80K per year needs any government income security but alas, I can appreciate some folks feel very tied to that OAS income stream.