For retirees who are worried about longevity risk, deferring OAS and CPP benefits from age 65 to as late as 70 is a valuable option. That results in bigger monthly payouts because of statutory “enhancements” — 36% for OAS, 42% for CPP — as well as the fact that the guaranteed-for-life payments are inflation-indexed.
But Jonathan Chevreau, founder of the Financial Independence Hub, cautions that deferring the OAS benefit can have negative consequences. “OAS benefits begin to be clawed back once taxable income exceeds $75,910 (rising to $77,580 in 2019) and is completely clawed back at $123,386 of net income,” he wrote in a column for the Financial Post.
CPP benefits, he noted, aren’t subject to such clawbacks. Chevreau also noted that CPP has limited survivor benefits, while OAS does not.
Citing advice from TriDelta Financial wealth advisor Matthew Ardrey, he said that a larger OAS payout puts retiree clients at greater risk of exceeding the threshold. Considering that retirees are required to make annual and taxable deferrals from their RRIFs after age 71, Ardrey estimated that someone with $10,000 in annual CPP income and a $1.25 million RRIF would already be at the OAS threshold, so they may be better off taking OAS when they turn 65. The prospect of “going bust,” to borrow a term from blackjack, gets even higher because of the 138% dividend “gross-up” on non-registered Canadian dividends, he added.
An even more severe risk of deferring OAS comes when one overestimates their lifespan. In a recent blog post, Doherty & Bryant Financial Strategists Vice President Aaron Hector described the hypothetical case of “Mr. Smith,” who deferred OAS to 70 because he expected to live till 95. But that outlook changed when he was diagnosed with a serious medical condition at age 67.
In such a case, Hector said he could file a request with Service Canada for an effective OAS start date that predates his original application date by up to 12 months; if they approve the request, they will send a lump sum for the retroactive payment.
But if Mr. Smith were to die at 67, his estate or survivor could invoke little-known provisions of the OAS act, applying to begin Smith’s OAS pension with an effective date of one year prior to his date of death. “Keep in mind that OAS payments always end on death: our concern here is merely the opportunity to collect for the one year prior to death,” Chevreau wrote. Aside from the post-death OAS application, executors should be aware of the option to file a Separate Rights or Things tax return, which would shift the OAS lump sum away from the final tax return and mitigate the risk of a clawback of OAS benefits.
A similar post-death option exists for CPP, but the executor can only apply for retroactive payments when the deceased is over age 70. “[B]ut since there is no benefit to deferring CPP beyond 70 people rarely do it,” Chevreau said.
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