As people are closing in on retirement and the magic age of 65, there is a common question we get respecting their retirement plans. Sixty-five is a number and some people are not ready or cannot afford to retire at that age.
Some people are going to continue to work. So, they are asking, or we are advising to watch how much they will make before their Old Age Security (OAS) gets reduced.
OAS and supplemental income
This is a good question because it raises other questions such as:
- Will you have other income from the Canada Pension Plan (CPP), too?
- How much OAS are you willing to lose?
- Does it make sense to delay your CPP and OAS?
As a reminder, the amount of clawback you may face is based on your net income from all sources (including worldwide) and how far into the clawback zone your income reaches.
There’s no line in the sand where, once you cross, you lose all your OAS pension. Instead, there’s a zone that, in 2024, starts at $90,997, and you slowly lose your OAS through the OAS pension recovery tax as income reaches $148,451. The initial threshold increases every year with the rate of inflation.
How much OAS do you lose when you work in retirement?
The rate at which you lose your OAS is $0.15 for every dollar of income above $90,997. This will make more sense if we work through a couple of examples.
Assume you have a net income of $100,000, it puts you $9,003 ($100,000 minus $90,997) over the initial OAS threshold. You will have a recovery tax of $1,350 ($9,003 multiplied by 15%) of the $8,752 OAS pension. That is the pre-tax amount to pay back. Your actual spending loss is about $945. That is the after-tax amount received assuming a 30% marginal tax rate.
Depending on your plans, you might accept that loss.
How CPP can affect OAS
Now, what if you have additional income sources other than your salary? As a reminder, the OAS clawback is based on your total net income, which includes things like CPP.
What if you forget to add in your CPP and OAS to figure out your net income? Remember, your net income includes CPP, OAS, pension income, and others including rental income, dividends, interest and taxable capital gains.
For example, if your salary is $100,000, and you collect CPP of $15,000 and OAS of $8,732, then your income is $123,732 and your OAS recovery tax is $4,910.
Splitting income with a spouse
Once you get into the clawback zone, look for ways to either reduce your net income or split pension income with your spouse. If you have a defined benefit (DB) plan, you can split that income with your spouse at any age. And when you turn 65, Cindy, you can split Registered Retirement Income Fund (RRIF) income.
I mention this because I’ve met people who were under the impression they could split regular income after age 65. You can’t split your employment income after age 65, only pension income.
What if you have an OAS clawback?
If you realize you’re going to lose some or all of your OAS, consider delaying your CPP and/or your OAS. Most Canadians are automatically enrolled into OAS at age 65. So, you must apply to have it stopped. You have six months to stop OAS once it has started. OAS increases by 0.6% for each month you delay it beyond your 65th birthday. That’s 7.2% a year, and 36% if you delay to age 70.
This is different from CPP, which increases at a rate of 0.7% for each month you delay beyond your 65th birthday. And this is one reason why delaying CPP over OAS normally takes precedence, plus the fact that there is no CPP clawback.
Why delay OAS
Another big advantage of delaying your OAS is that the upper threshold of the OAS clawback zone increases. It does so because of the clawback formula, losing $0.15 for every dollar you are over the threshold.
If OAS is $8,732 at 65, delaying to age 70 (for a 36% increase) bumps your OAS to $11,875. In this case, the upper limit of the OAS clawback zone is $170,163, almost $25,000 more than if you don’t delay your OAS. This means you can have a net income of up to $170,163 before you lose your OAS.
Other benefits of delaying include your OAS benefit increasing by 10% on your 75th birthday, based on the amount you are receiving ($11,875) and not on the amount you would have received at age 65, $8,732, as an example.
So, a 10% increase of $1,187, rather than a 10% increase of $872, if you started OAS at age 65. And this extra amount further extends the upper end of the clawback zone. Also, OAS increases by the rate of inflation, and a 3% rise on $11,875 results in more money than a 3% rise on $8,732.
The bottomline
So, back to the question at hand, should you delay OAS if you are retired and working?
I suggest looking at your tax return from 2023, to confirm your net income amount, and then add in any new income you may receive in 2025, including CPP and OAS if they apply. We can assist clients with this if needed. Your accountant is a friendly resource as well. Then later in 2024 or early 2025, check on the initial OAS clawback zone for 2025. You may even want to take it one step further and have some projections done so you can see the implications of taking or delaying your CPP and OAS.
Your financial planner is simply a phone call or email away from completing this for you. Thinking ahead avoids encountering this after the fax and is an important strategy for Keeping Life Current.
