Pensions – What is the Right Age?

We’ve all seen or been around someone who is getting to the age where they can start drawing a pension if they choose. The question is, is it the best time to do so?

This question is on a lot of Canadian’s minds every year; do I apply for CPP and OAS or do I defer and draw it when I am older? It’s a tough question to answer because there are many factors that play into whether you should wait or not. But first, let’s look at what those ages are…

For CPP, the minimum age you can start drawing out the pension is 60 but don’t jump onto that right away without doing your research first. At age 60, you can apply to start taking a reduced CPP at a rate of 0.6% per month you draw out before your 65th birthday. This works out to be 7.2% per year to a maximum of 36%. The adverse is also true. If you decide to defer your CPP payments until after you are 65, then you will receive an increased benefit of 0.7% for every month you defer. This works out to be 8.4% per year up to a maximum of 42% at the age of 70. After you hit 70, you have to take out your CPP.

One thing that should be noted, you have to apply for your CPP. CPP will not start automatically and the government will not apply on your behalf.

Now that we’ve gotten the age out of the way, let’s look at when you should start to draw CPP or some common scenarios.

Example

Although Amrita enjoys her job as a nurse, she plans to retire when she reaches 65 in 2014. Based on her CPP Statement of Contributions, she expects her CPP retirement pension in 2014 to be $6,220 annually. This amount will then grow with the cost of living, as measured by the Consumer Price Index.

However, if Amrita decides to delay taking her CPP pension until she reaches 66 in 2015, her CPP retirement pension will increase by 8.4% (0.7% x 12 months). Based on this change, the annual amount of her pension will increase by $522, and will then grow with the cost of living, as measured by the Consumer Price Index. ~ Taken from the Canada.ca website

OAS is similar in that it will offer you a monthly payment but it’s one that you do not contribute to directly. It’s funded through general revenues from the government. There are three deciding factors in if you qualify:

  • be 65 years or older
  • be a Canadian citizen or legal resident at the time your OAS is approved
  • have resided in Canada for at least 10 years since the age of 18

If you meet those three criteria, then you can apply (there are some other deciding factors if you reside outside of Canada but are still a Canadian citizen). Like your CPP, you can defer for up to 5 years. Each month you defer your OAS, you will receive 0.6% more per month to a maximum of 36% by age 70. If you do defer, you will no longer be eligible for the guaranteed income supplement and your spouse or common-law will not be eligible for the allowance benefit. The questions we will ask you when determining when the best time to take your OAS or if you should even defer is:

  1. What is your current and future sources of income;
  2. What is your current and future employment status;
  3. Are you in good health or have any family history of health issues; and
  4. What are your plans for retirement

You are allowed to continue to work and receive your OAS, but there is an annual maximum income amount that you can receive before you have to start repaying some OAS back. The ideal solution is to defer until your income will be lower to avoid the penalty if you can.

 

It’s never to early to start planning for your retirement. There are two main people you should sit down with and start the discussion: Financial Adviser for your investments and a Tax Specialist on how you can limit your tax liability when you retire.

At Accountable Value Financial Services, we can sit down with you and determine the best time to apply for your CPP and OAS. We can also help you plan for your retirement so you can continue doing things that you love. We can also put you in contact with Financial advisers who can help set up your retirement benefits such as RRSP’s and non-registered savings plans. Declaring your CPP and OAS on your taxes is a must. If you have pensionable earnings to declare, we can help! Contact us today to get started with your pensions.