There is a lot of confusion when it comes to trying to decide when it would be the optimal time to take your Canadian Pension Plan (CPP) and Old Age Security (OAS) payments.
However, if you are able to answer a few simple questions,
the decision may be easier than you think:
1) Are you still working?
2) Do you have an RRSP/RRIF or LIRA/LIF?
3) Do you have a pension plan through work or own rental properties?
For starters, if you do not already know how much CPP and OAS you are potentially entitled to, you can get an estimate of your monthly CPP retirement pension payments by signing in to your My Service Canada Account and to get an estimate of your monthly OAS payments you can utilize the Old Age Security Benefits estimator.
CPP
You can start receiving CPP anytime between ages 60 and 70. CPP payments will decrease by 0.6% each month (or by 7.2% per year) up to a maximum of 36% if you start receiving CPP at age 60. If you start receiving CPP payments after age 65, payments will increase by 0.7% each month (or by 8.4% per year) up to a maximum of 42% if you start at age 70 (or after).
OAS
You can receive your first OAS payment the month after you turn 65. However, you can receive a higher amount for each month you decide to delay your first payment.
You have the option to delay payment of your OAS payments for up to 60 months (5 years) after you are 65[i]. If you wait to receive OAS after age 65, you will get .6% more for every month you delay receiving OAS. Which amounts to a 7.2% annual increase and a 36% total increase.
If your total income is greater than $90,997 (2024), you will have to repay part or your entire OAS payment[ii].
Question 1: Are you still working?
If you are still working full-time, you may not need any additional income to meet your day-to-day needs. However, if you are working part-time, do you need funds from either your CPP or OAS (or both) payments or one of your investment accounts to meet your day-to-day needs?
If the answer is yes, then taking your CPP or OAS may be a great option to supplement your income, if you do not have any other investments that you can liquidate to make up the difference. However, if you have money in a TFSA or a Non-Registered account, then it may make sense to withdraw funds from these accounts to meet your basic needs as the withdrawals will not be taxed as income.
You can withdraw funds from a RRSP, RRIF, LIRA or LIF, however this will have tax consequences as the withdrawals will be taxed as income, it also acts as a great segway to question number 2.
Question 2: Do you have an RRSP/RRIF or LIRA/LIF?
If you have an RRSP/RRIF or LIRA/LIF at some point you will have to start withdrawing funds from your account(s). RRSPs must be converted into RRIFs, and LIRAs must be converted into LIFs by the end of the year when you turn 71, however you can make the conversion anytime after your turn 55.
The key thing to remember with payments from one of these four accounts is that they are also taxed as income and are all counted towards your OAS clawback calculation.
Question 3: Do you have a pension plan through work or own rental properties?
As we previously discussed, your OAS payment will be clawed back if your total income is greater than $90,997. The income that you receive from a pension plan will be taxed as income.
In retirement, if you are receiving CPP, RRIF/LIF income, and pension income through a former employer, you run the risk of having your OAS clawed back or even eliminated. The risk is even higher if you are receiving income from a rental property. Here are some general strategies that you can apply to determine when the best time to take CPP and OAS is.
Strategy 1: Keep on working!
In June 2023, it was reported by Statistics Canada that just over one-fifth (21.8%) of Canadians between the ages 55 to 59 years reported that they were either completely or partially retired. This proportion doubled to more than two in five (44.9%) for those between the ages of 60 to 64 years, then nearly doubled again to four in five (80.5%) for those between the ages of 65 to 69 years. For Canadians who are 70 years old, over 90% of the reported that they were completely or partially retired.[iii]
Among those who reported being completely retired, over one-third (35.0%) of men and more than one-quarter (28.2%) of women noted that financial reasons were the main factor in determining the timing of their retirement. People in this group reported that the most important factors leading to their retirement was that they were either financially ready, they had qualified for a pension, or they had deferred the start of their Old Age Security pension in exchange for a larger amount.[iv]
What was very interesting was among the people who had not completely retired but were planning to retire, more than half (55.1%) reported that they would continue working longer if they could work part-time, and about half (48.9%) reported that they would continue working if they could work fewer hours without affecting their pension.
If you plan to work well into your 60’s, then delaying receiving your CPP and OAS payments makes perfect sense.
Strategy 2: Liquidate your RRSP/RRIF and LIRA/LIF before you turn 70
Let’s use an optimistic example where you are able to retire right at age 55 and you have a pension through work and/or a rental property. If you have accumulated funds inside your RRSP or LIRA, then convert them to a RRIF or LIF and withdraw the funds over the next 15 years and delay receiving your CPP and OAS payments until age 70. By doing this you will be able to use the RRIF or LIF income to subsidize your lifestyle and since you are still relatively young, you are more likely to travel from the ages of 55 to 70, then you will be in your 80s and 90s.
By liquidating your RRIF and LIF income as much as possible before your turn 70, you will be able to defer your CPP and OAS payments later and will therefore be able to not only receive higher CPP and OAS payments, but you will be able to reduce the likelihood of your OAS payments being clawed back.
Strategy 3: The Balanced Approach
If you do not have a pension through work or a rental property, your RRIF and LIF income will play a more vital role in your retirement years and the risk of an OAS claw back will be less likely. In this scenario, it is advisable to balance using your RRIF and LIF income alongside your CPP and OAS payments to pay for your living expenses, keeping in mind that 100% of your payments will be taxed as income.
By delaying your CPP and OAS payments by one full year, you will increase your future CPP and OAS payments by 8.4% (after age 65) and 7.2% respectively, this can be thought of in a similar vein to a return on one of your investment portfolios. By comparing your CPP and OAS payment increases to the portfolio inside your RRIF or LIF, you can determine if it makes sense to withdraw funds from your RRIF or LIF sooner, in order to increase your future CPP or OAS payments or if you should take your CPP and OAS payments sooner and continue to let your RRIF and LIF accounts potentially grow in value.
Final Words
When making financial decisions it is always important to
remember that you have your own unique circumstances in your life that will
determine the best course of action for you to take. However, the questions and the strategies
discussed in the article should help you plan the best course of action to make
the most of your retirement.
[i] https://www.canada.ca/en/services/benefits/publicpensions/cpp/old-age-security/benefit-amount.html
[ii] https://www.canada.ca/en/services/benefits/publicpensions/cpp/old-age-security/benefit-amount.html
[iii] https://www150.statcan.gc.ca/n1/daily-quotidien/230801/dq230801a-eng.htm
[iv] https://www150.statcan.gc.ca/n1/daily-quotidien/230801/dq230801a-eng.htm
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