31. That other government pension plan... OAS (Old Age Security)

Transcript:

Hello, and welcome back to the Canadian Money Roadmap podcast. I'm your host, Evan Neufeld.

Today, we are continuing with our series on my retirement readiness checklist, and we are going to be talking about the other government pension, Old Age Security or OAS.

Now before we get started, if you haven't yet downloaded the retirement readiness checklist that I've already referred to, head over to my website at www.evanneufeld.com and you can find it there on the homepage for download and you can follow along with us.

These first few episodes, we've been talking about your sources of income during retirement, that don't fall under withdrawals from your investments or from your savings. And so today's episode is going to be about another government pension. Last week, we talked about Canada pension plan. This is another government pension called old age security.  So we'll talk a little bit in detail about how it works, how much you can get and how you qualify for it. Old Age Security is a little bit different and there's a lot of details and other programs that can dovetail into old age security. So instead of making this just a fact regurgitating episode, I'll include a few links in the description below where you can look it up on the government of Canada website for any specifics, but I'll try to cover some of the basics here.

So Old Age Security is a government pension, but unlike CPP or a Canada pension plan, it has nothing to do with whether you have actually worked. So it is not something you contribute to, but it comes out of tax revenue. So, if you qualify for the maximum, you'll get the same amount as everyone else that qualifies for the maximum, regardless of your contributions, because there's no contributions to it.

So old age security is a guaranteed source of income. It'll pay at least the same amount every month after age 65. So it starts at age 65. I'm going to come back to this in a, in a second, but you can defer it up to age 70 if you'd like, but generally speaking, most people get it at age 65 and then every month for the rest of your life.

The benefit is taxable, so it is included in your taxable income, just like CPP, just like employment income, everything like that. So the more income you have, the more tax you're going to pay. It is also inflation protected and that's evaluated four different times per year. There was just another one done here recently and so that follows the CPI or the consumer price index. So essentially if things on average are getting more expensive, the amount of your old age security payments will also increase by that same rate. So how much can you actually get? Well, current recipients right now would receive a maximum of $635 per month.

Now that might not sound like a ton of money to some people, but it's $635, like that's real money and you can actually do a lot with that. That might cover off some of your utility bills for example, in retirement.

So, if you look at my retirement readiness checklist, my question there says, do you qualify or will you qualify for old age security? So that sounds like a bit of a loaded question based on how I've introduced the OAS here. It says, well, I'm a Canadian and maybe I'm over 65. Why wouldn't I qualify? So I'll talk about two different things here.

One is qualifying for it in the first place and what you can do to qualify for the maximum. So to qualify at all, you need to be 65 years or older, be a Canadian citizen or legal resident at the time you apply and you have to have been in Canada for 10 years already. So for a first-generation Canadian that just arrived here, you wouldn't qualify for old age security until you've been here for 10 years.

Now that doesn't allow you to get the maximum, that $635 a month like I mentioned. To get the maximum, you actually have to have lived in Canada for 40 years. So old age security is a benefit that mostly is provided to people who have lived here their whole lives. And that just makes sense that people that have been here for the longest, contributed to paying taxes and things like that, they're the ones who qualify for the most.

So that's how you can get the maximum at age 65 by being in the country for 40 years. But I mentioned at the beginning that you can actually defer your payments up until age 70 or anytime between 65 and 70. And what's the benefit of doing that? Well you actually get an increase in your benefit and that increase is set for the rest of your life.

If you remember, the Canada pension plan gives you a 0.7% benefit per month for deferring. Old age security is pretty good, but it's not as juicy. So you get a 0.6% increase for every month that you defer it past your 65th birthday. So if you defer it for the full five years and you take it when you turn 70, you'll get a 36% increase compared to where you would have had it at age 65.

Now on the other side of the coin, there is another little pesky thing that you will want to be aware of when planning for your retirement income. There's a little thing called the OAS recovery tax. More often than not you might hear it referred to as clawback. Where essentially, there is an income threshold where the government says, well, if this is old age security and you actually have tons of taxable income already, you don't really need this security that comes along with this pension.

So right around $79,000 of taxable income per year is where the recovery tax starts. I won't get into the details of it. It's kind of complicated with how it's calculated. Essentially, if you have over $79,000, your pension will start to get reduced. And that reduces up to the point where if you have up to about $125,000 of taxable income, it's a little bit less than that, but about $125,000, that's where the government says, okay, you no longer qualify for this at all.

So it has reduced little by little up until that income threshold hits and then you won't actually receive OAS anymore. Now that resets, depending on there might be a situation where you have an unusual amount of taxable income in a given year. That doesn't mean you're penalized forever. You're just penalized for the next period where they calculate it. So it's, it's not the worst case scenario, but if you have income within that threshold, you'll have to repay some of this pension back.

So knowing that at age 65, you can get this pension, but if you have taxable income over that 79,000 ish threshold, and you'd have to pay some back. If you want to start planning for your retirement income in those years, prior to age 65, say for example, you had a property or you have some non-registered investments with significant capital gains. By incurring those capital gains earlier, before age 65, you'll actually increase your chances of getting your full OAS pension.

But the income tax implications are exactly the same.  Capital gains at age 62 for example, are exactly the same as capital gains at age 70. So you won't necessarily change your income tax situation, but by incurring some of those things prior to age 65, you increase your chances of having less taxable income after 65 and then qualifying for the full amount of old age security.

Now there are some secondary benefits that I'm just going to mention briefly here. I wanted to keep this episode short, but I think it's worth mentioning. So for those folks who haven't had the opportunity to save, or they don't have much taxable income in retirement from other sources say defined benefit pension or an employer savings program, things like that.  What happens and how do those people fund their retirement and their old age years?  Because as you can probably guess, $635 a month isn't going to move the needle a lot.

So along with old age security, there is something called GIS. I don't want to introduce too many acronyms here, but this is the guaranteed income supplement. This is something that pays an additional benefit to those folks who have much lower incomes than most. Then you can qualify for that one after age 65.  If you're before age 65, there's something called the allowance that you could qualify for. And if you're married or single or widowed, these payments, they change quite drastically based on your family situation and your income situation. Because there's so many details there, I’ll invite you to just click on the links in the show notes here, and you can look up those details for yourself.

They do change from time to time, especially with different governments that are in place. There's a benefit, for example, that's changing now for those age 75, that's going to start next year. 

So I just wanted to introduce them so you have an understanding that once you get to a certain age, even if you don't have significant savings yourself, there are programs in place that will help you pay for your retirement.

Now, they're not going to be able to provide you a luxurious retirement, but most of these programs help people to just make sure there aren't those in our society that are completely falling by the wayside and missing out on essentials. If you want to have a retirement that's full of travel and going out and doing activities. These types of government benefits are not going to be able to provide that type of lifestyle. So you need to make sure that you're following along with the rest of my checklist here to make sure that you're going to be in place to have the retirement that you want. Not just the baseline retirement level of income that'll keep you around.

But just to summarize here, old age security is another government pension. It’s not based on what you contribute to it by working, but you are able to qualify for it by being a 65 years or older Canadian that's lived in the country for at least 10 years. You get the maximum amount if you've been here for at least 40 years at age 65.

Currently the maximum that you can get at age 65 is $635 a month and that is both taxable, but also inflation protected. So that amount is going to go up as the cost of living goes up in Canada. OAS is part of what I call your income floor and that's partnered with CPP and any other guaranteed sources of income you have.

Well, it might not mean a lot to have an extra $635 a month, it can really make a difference for a lot of people and I believe it is worth planning for and understanding so that you can make sure to get as much of this benefit as you possibly can. 

Thanks for listening to this episode of the Canadian Money Roadmap podcast. Any rates of return or investments discussed are historical or hypothetical and are intended to be used for educational purposes only. You should always consult with your financial, legal and tax advisors before making changes to your financial plan. Evan Neufeld is a Certified Financial Planner and registered investment fund advisor.  Mutual funds and ETFs are provided by Sterling Mutuals Inc.