Voluntary deferral of OAS

As part of the 2012 federal budget, the government announced three changes to Old Age Security (OAS)program.

  1. The age of eligibility for OAS will gradually increase from age 65 to age 67.
  2. You will be able to defer taking your OAS pension by up to five years in order to receive a higher monthly pension.
  3. The government will start a proactive enrolment process that will eliminate the need for many people to apply for OAS and the GIS (Guaranteed Income Supplement).

Related article:  Three changes to OAS

The increase in the eligibility age doesn’t start to take effect until April 2023, with full implementation by January 2029. The proactive enrolment for OAS is supposed to be implemented in a phased-in approach from 2013 to 2016, but I haven’t seen much detail on it yet. In any case, I see the impact of this initiative as minimal.

The voluntary deferral of OAS is effective as of July 2013 and the impact can be quite significant, so this change is the focus of my article today!

What is meant by voluntary deferral of OAS?

Voluntary deferral means delaying your receipt of OAS pension in order to receive a larger pension at a later date. The term “voluntary” is perhaps a bit of a misnomer, however, since the larger benefit will be payable whether the delay was intentional or just an oversight.

Who is affected by the voluntary deferral of OAS initiative?

Anyone under age 70 and not in receipt of OAS as of July 2013 is potentially affected by this initiative. You will be able to defer your OAS whether you’re eligible for the full OAS or just a partial OAS, although you cannot “double-dip” by waiting. (I’ll explain this in more detail later.) Voluntary deferral does not affect the income-tested benefits of GIS, the Allowance or the Allowance for the Survivor.

What is the impact of voluntary deferral of OAS?

For each month of “valid” deferral, your OAS pension will be increased by 0.6%. The maximum deferral is 5 years, which would increase your OAS pension by 36%. I used the qualifier of valid deferral, because there is no increase in your pension in the following situations:

  • For any period of time before July 2013
  • For any month after you turn 70 years of age
  • For any month before you meet the residence requirements for a full OAS
  • For any month before you reach any specific step in the 1/40ths eligibility for a partial OAS (This is what I referred to as double-dipping above, and which I’ll explain more fully in the third example below.)

Here is a chart that shows the dollar impact of deferral on a full OAS pension (using current May 2013 rates), as well as the breakeven age (the age at which you would begin to be ahead if you deferred the start of your OAS pension beyond age 65.)

Age 65 Age 66 Age 67 Age 68 Age 69 Age 70
Monthly amount $546.07 $585.39 $624.70 $664.02 $703.34 $742.66
Breakeven age n/a 80 81 82 83 84

 

The above chart demonstrates that the basic premise of voluntary deferral of OAS is fairly easy to understand and evaluate. However, due to the restriction of no deferral before July 2013, and no “double-dipping” on meeting the residence requirements for full or partial OAS, the actual implementation is slightly more complex.

Here are some examples that may help to demonstrate those complexities.

EXAMPLE 1

In this example, let’s say that Joe turns 71 in July 2015 and he finally decides to apply for his OAS. (He may have had his own reasons for not applying earlier, or he may just not have been aware of OAS until then.) Joe will be limited by both the July 2013 restriction and the age 70 restriction above, so his valid deferral is just 12 months or 7.2% overall. Luckily for Joe, however, OAS provides for a maximum of one year of retroactivity for a late application, so at least he is compensated in that way for his delay beyond age 70.

EXAMPLE 2

In this example, let’s say that Mary lived in Canada from birth to age 34 and then she left Canada for work reasons. She retired and returned to Canada at age 60 in June 2010. She inquires about OAS when she turns 65 and is told that in one year when she turns age 66, she will be eligible for a full OAS under the “three-for-one” rule. (She would also have other choices for an immediate partial OAS pension, but let’s ignore that for now.) When she turns age 66 in June 2016, she is eligible for a full OAS, but she doesn’t receive any increase for voluntary deferral, because she didn’t meet the residence rules for a full OAS until that date.

EXAMPLE 3

In this example, let’s use Mary again, but let’s have her return to Canada at age 65 in June 2015. At that time she is eligible for a partial OAS pension of 16/40ths immediately, or she can wait four more years until age 69 to qualify for a full OAS. She initially decides to wait for a full OAS, but she decides a year and a half later (for health or financial reasons) that she wants to start receiving her OAS immediately. At that point, she would have 17.5 years of residence in Canada after age 18, and she would have three choices as follows:

  • A full year of retroactivity at 16/40ths partial OAS, plus a six-month deferral increase of 3.6%
  • Six months of retroactivity at 17/40ths partial OAS with no deferral increase
  • No retroactivity, but 17/40ths partial OAS with a six-month deferral increase of 3.6%

As mentioned above, this third example demonstrates that if you delay applying for your OAS, you can increase your partial pension by adding extra 40ths, or you can increase your pension by the voluntary deferral percentage, but you can’t “double-dip” and use the same period of time to count for both purposes.

Here are links to four Government of Canada web pages that provide more information about the voluntary deferral of OAS, as well as the other upcoming changes to OAS.

Written by Doug Runchey

Doug Runchey worked for the Income Security Programs branch of Human Resources and Skills Development Canada for more than 32 years, and was a specialist in the Canada Pension Plan and Old Age Security legislation, regulations and policy areas. He now runs his own company, DR Pensions Consulting, which provides pension advice, including detailed calculations for CPP retirement planning and “credit splitting” purposes. Doug can be reached by email @ DRpensions@shaw.ca or check out his website at http://www.drpensions.ca/.

8 Responses to Voluntary deferral of OAS

  1. Good article.

    Have you or Jim looked at the pros & cons of delaying CPP & OAP specifically for inflation protection?
    Jim has had earlier articles advocating “take it early” & others have argued to delay.
    In our case the gov’t $$$ will be the only indexed retirement payments. The rest will be RRSP, TFSA, & non registered investments, probably with some portion in annuities.
    Those of us entering retirement remember inflation in the 70’s all too well.
    By delaying to 70 we would have enough from gov’t. only (probably with a purchased annuity as well) to do OK. Especially given that spending drops in peoples 70’s.
    What do you think? Might a topic for a future article?

    Thanks

    Grant

    • Grant
      I’ve heard that suggestion before, but I’m going to stick to what I know best (CPP and OAS legislation and calculations) and I’ll leave it to Jim to comment on retirement planning scenarios. Thanks for reading!

    • If you think you will live a very long life, you might argue that delaying CPP makes sense. That being said, the MATH would tell you otherwise.

      In terms of inflation, I have no idea what the future will hold but in my humble opinion, I can’t see inflation of the 70’s coming back. In the 70’s boomers were all working, making money and spending it which attributed to the inflationary period.

      Boomers are now retiring. Often this means spending less, not more because incomes will be lower in retirement than pre-retirement.

      In the end, do what you feel is best for you and your situation. Good luck!

      • Agree — it’s a stretch to think of 1970’s style inflation coming back, but I think one should at least plan for inflation within the Inflation-Control Target range followed by the Bank of Canada (currently 1% to 3%, with 2% midpoint being the specific target.)

        On the other hand, I’d be interested in seeing how relevant the CPI actually is to retirees? The basket of products used to calculate the CPI is representative of Canadian consumers on average, which means it isn’t very representative of a specific subgroup like retirees that have different spending patterns. i.e. the CPI may be under- or over-stating the effect of inflation from a retiree’s perspective.

  2. Hi Doug / Jim

    Thank you for mentioning that the federal government in the 2012 budget announced that they will start a proactive enrolment process that will eliminate the need for many people to apply for OAS and GIS.

    In my field, I see delays receiving OAS or GIS payments because the paperwork is not received or is incomplete because of missing information. Some of these cases involve people who do not have a fixed address, are ill or incapable of completing the application necessary to qualify for income benefits.

    I don’t believe the government should allow the voluntary deferral of OAS. By the time someone is 65 years of age and having contributed to the economy for much of their normal working years (18-65) this benefit should simply be paid out.
    Your article highlights the financial benefits of the deferral of OAS and the breakeven points. The breakeven age ranges from 80 to 84. It would be great if you could comment on the percentage of males and females expected to live long enough to benefit from the deferral of OAS.

  3. I am in the 100% claw back club right now. I am also one who was advised that my OAS payment would start automatically this year at 65. I ignored that little notice, just put it in the file. My accountant told me very specifically to not collect OAS this year. I called OAS to make sure, that is when I was reminded of my situation – the automatic part. I sent a letter say do not pay, which was followed up by an “are you sure?” letter which I just sent in.

    So if I took the benefit this year, I would pay a high tax rate on this years benefit, and I believe I would lose the benefit for for following year when my income could be substantially lower and I might like to have the benefit. – I think.

    I don’t have a problem with applying later, as they will make it retroactive 11 months if required.
    Don

  4. Hi Doug

    Thanks for the great series of articles on pensions. Most informative. I ran some numbers on Excel to check the breakeven age using my own numbers for CPP and OAS. What I found interesting was what happened when I included a modest return on investment of 2.5% (based on an expected return of 4.5% less 2% for inflation). I think that to really compare the breakevens fairly, that the time value of money be included. The results added six additional years to the breakeven age for OAS for example. Higher rates would only further the effect.

    Garth

    • Garth

      You certainly raise a valid point, but getting everybody to agree on what might be reasonable numbers to use for inflation and/or for rate of investment is difficult. And many people who are making this decision will be using the OAS for living expenses rather than for investment purposes, so ignoring those factors is probably appropriate.

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