When Should You Start Collecting CPP and OAS?

Canada Pension Plan (CPP) and Old Age Security (OAS) are government programs that provide retirement income to Canadians. CPP is a pension that is funded by employers and employees and the amount you receive depends on your past earnings. OAS is paid to all Canadians and the amount depends on how long you have lived in Canada. These programs provide guaranteed income that increases with inflation and lasts your entire lifetime, providing a foundation of income for your retirement years.

How These Pension Plans Work

In order to collect CPP, you must be at least age 60 and have contributed to the program. You can find your contributions and an estimate of your benefits in My Service Canada Account. In order to collect OAS, you must be at least age 65 and have lived in Canada at least 10 years. However, it will begin to be clawed back if you earn over $91,000. In both cases, if you delay starting your benefits, the amount you receive will be increased, up to age 70. The average Canadian receives $758.32 per month from CPP and $713.34 per month from OAS. You should apply six months before you would like payments to begin, at which time these amounts will be calculated for you.

When Do Most People Start?

Because CPP is taxable income and OAS can be reduced in years of high earning, it makes sense to begin payments from both pension plans after you stop working and earning income. This way, the income from the government pensions will replace your earned income. We don't know how long each of us will live, so it's not possible to figure out how much total income you will receive from CPP and OAS over your lifetime. That's why the best choice might be the simplest one: beginning your government pensions at retirement.

When it Makes Sense to Start Earlier

If you are worried about having a shorter lifespan, you could start CPP and OAS as soon as you qualify. If you are still working at that time, you could contribute the amounts to your RRSP, thereby deferring the taxation. Another concern is that these government benefits end upon death. CPP provides a survivor benefit, but it is still capped at the CPP maximum. If you take income from CPP and OAS earlier and postpone withdrawing from your RRSP or RRIF, you could leave more money in your investment accounts. With increasing longevity, it is more likely than ever that at least one spouse will live into or beyond their 90s and your assets will transfer to the surviving spouse and remain in their control. Your investment accounts will also form part of your estate and pass to your beneficiaries, after paying tax. Starting to collect government benefits earlier can provide greater control and flexibility of using the assets that you have in your own investment accounts.

When it Makes Sense to Start Later

If you see value in the indexing and longevity guarantees of government pensions, you could start both CPP and OAS as late as age 70. You would receive a higher income from each program, and that amount will increase with the cost of living and is guaranteed to last your lifetime. If your RRSP isn't likely to produce adequate retirement income, you could spend down your own retirement assets while deferring CPP and OAS to age 70. This could also be a useful approach if your RRIF minimum is too high and will cause your OAS to be clawed back, which may be solved by taking higher early withdrawals from your RRIF and deferring OAS income.

Retiring Early

CPP income is calculated based on your average earnings while you contributed. For most people, the calculation will drop out the seven or eight lowest earning years. If you retire before age 65, the years without earnings before age 65 still count in that calculation and could reduce your benefit. Starting CPP as soon as possible can avoid counting low-earning years if you retire before 65.

There is not just one right answer for everyone. Whether you are considering starting CPP early, starting at age 65, or delaying CPP and OAS to age 70, the best decision for you depends on tax considerations, longevity expectations, and individual financial goals. Starting benefits earlier can offer greater control over your own investments and potential tax savings, while delaying until age 70 ensures higher guaranteed income with indexing. By understanding how CPP and OAS work and the implications of different starting ages, you can better plan for a secure and comfortable retirement.

You can read more articles about financial planning and other financial topics. If you have questions about this article or would like a conversation about how these ideas apply to your unique situation, call us at 403-290-0940.