This article was reviewed by Chris Singer, CFP®.
Have you been asking yourself, “when should I collect my Canada Pension Plan and Old Age Security?” If you have, you’re off to a good start. Asking questions and thinking ahead are an essential part of securing your financial future—the more prepared you are for retirement, the better! To help set you up for success, we’re going to guide you through the key factors to consider when deciding when to begin collecting Old Age Security (OAS) and the Canada Pension Plan (CPP), including the benefits of waiting and the advantages of collecting early.
Canada Pension Plan (CPP): What it is, who qualifies, and when to start collecting.
Before we jump into when you should start collecting your Canada Pension Plan, we’re going to quickly cover who qualifies. To qualify for CPP, you have to have worked in Canada and made a minimum of one valid contribution. It’s also important to note that the financial assistance you are entitled to receive is dependent on how long, and how much, you contributed to the plan.
CPP is designed to replace a portion of your pre-retirement earnings, making it an essential component of your retirement income in Canada. The standard age to begin collecting CPP is 65, but you can begin collecting as early as 60 or as late as 70. If you choose to collect CPP before the standard age, your payments will decrease by 0.6% each month or 7.2% per year. For example, if you choose to start receiving payments at 60, your pension will be permanently reduced by 36%.
On the other hand, if you delay collecting CPP past the standard age, your benefits will increase by 0.7% for each month you wait, or by 8.4% per year, up to age 70. If you choose to start collecting at 70 (you cannot delay past this age), your payment will be increased by 42%.
So, when should you start taking CPP? First, you need to consider what other taxable income you will have and determine your retirement income without CPP. Often, people are anxious to start receiving their CPP and start too early. Most people benefit from waiting until at least age 65 and in some cases 67 to start collecting.
When should you start collecting Old Age Security (OAS)?
The OAS is a taxable government assistance program designed for people aged 65 and older. In order to qualify, you have to be 65 years or older, be a Canadian citizen or legal resident when you apply, and have resided in Canada for a minimum of ten years since you were 18. If you are a Canadian resident living outside of Canada, you can find out if you qualify here.
Your payment is determined by the number of years you have resided in Canada since turning 18 and the current maximum monthly OAS payment is $691 (for individuals between the ages of 65 and 74) and $760.10 for people aged 75 and above.
With Old Age Security payments, it’s important to be aware that your benefit can be subject to clawback or repayment. If your yearly income surpasses the minimum income recovery threshold (which is at $86,912 in 2023), you will be subject to clawback. The clawback is applied based on your net income, so for every $1 of net income above $86,912 (2023), the maximum OAS pension is reduced by 15 cents. To lose your entire benefit, you would need to have net earned income of $142,124 in 2023. You can learn more about repayments and income thresholds here.
The amount you receive increases for every month you delay receiving benefits after the age of 65, up to a maximum of 36% if you start at age 70. As of July 2013, you have the option to postpone receiving your OAS for a maximum of 60 months (equivalent to five years). When you delay your OAS pension, the monthly payment will be boosted by 0.6% for each month of delay, culminating in a maximum increase of 36% by the age of 70.
So, what to do? The biggest thing to consider in when to take OAS is how much you are earning in net income. Will this change in the next five years? Will you be selling a property or a business that will have a significant impact on your taxes? Is your income still at a high level due to work or business ownership? The answers to these questions will determine when to apply for OAS and allow you to plan to avoid possible repayments.
Lifestyle Factors to Consider When Making Your Decision
When to start collecting CPP and OAS is not always a straightforward decision. When you’re gathering information, examine your lifestyle, health, current investments, and income streams—this a good place to start that will help inform your decisions.
Health and Life Expectancy: Assess your health and life expectancy. If you expect to live a long, healthy life, waiting to collect OAS and CPP could be a smart choice as it will maximize your benefits in the long run.
Other Sources of Income: Consider your other sources of income, such as workplace pensions, investments, and savings. If you have substantial income from these sources, delaying OAS and CPP can provide you with a more financially secure retirement.
Income Tax: Your taxable income is one of the most important things to consider. From ages 60 to 70 as this can impact the amount of your pensions that you get to keep.
Future Financial Decisions: Consider your financial goals for retirement. Are you selling a secondary property or business? Are you still working and will you have through your 60’s? Do you have plans for extensive travel, a second career, or a luxurious lifestyle? Delaying OAS and CPP can provide you with a more significant monthly income to support these ambitions.
Benefits of Waiting to Collect
- Tax Efficiency: Delaying OAS and CPP can be tax-efficient, especially if you have other sources of income. It allows you to spread your taxable income over a more extended period, potentially reducing your tax liability.
- Increased Monthly Benefits: Delaying the collection of both OAS and CPP will result in larger monthly payments. This additional income can make a substantial difference in your quality of life during retirement.
- Enhanced Financial Security: Waiting to collect OAS and CPP can provide a more robust financial safety net for your later years, giving you peace of mind in case of unexpected expenses or changes in your health.
Benefits of Collecting Early
- Immediate Financial Need: If you are facing financial hardship or immediate expenses, collecting OAS and CPP early can provide the necessary support.
- Health Considerations: If you have health issues or a shorter life expectancy, collecting benefits early may be a more sensible choice, as it ensures you receive the maximum benefits during your lifetime.
- Lifestyle Preferences: If you have specific retirement plans, such as early travel or leisure activities, collecting OAS and CPP early can help fund those experiences.
Deciding when to start collecting Old Age Security (OAS) and Canada Pension Plan (CPP) is a big decision that can significantly impact your retirement and your quality of life during your golden years. Your choice should be based on your specific financial situation, health, and lifestyle. Delaying the collection of OAS and CPP can result in higher monthly benefits and enhanced financial security; there are valid reasons for collecting these benefits early, such as immediate financial needs or health considerations.
Consulting with a financial advisor to assess your circumstances will help you make an informed decision that aligns with your retirement goals. Your golden years should be filled with financial security and the freedom to enjoy the retirement lifestyle you’ve always dreamed of. By carefully considering when to collect OAS and CPP, you can take a significant step towards achieving that dream.