Thinking about how you’ll support yourself after you retire? The balance in your savings account or a registered retirement savings plan (RRSP) might come to mind. That’s a great start. But when you’re planning for your retirement, don’t forget the money you could get from the government. That’s the Canada Pension Plan (CPP) or Quebec Pension Plan (QPP) and Old Age Security (OAS). These are public pensions designed for Canadians who are no longer working.
Mark Coutts is a Sun Life Financial advisor and Certified Financial Planner™ with Coutts Financial Services Inc. “People often forget that CPP and OAS will form part of their nest egg or they underestimate their value,” he says. “Once they realize that these benefits alone could potentially pay up to $20,000 per year, per person, they begin to feel a lot more enthusiastic about their financial future.”
So, how do you make sure you’re getting the most you can out of CPP and OAS? It all comes down to timing. As you approach your retirement, you’ll need to sort out whether you want to start collecting money sooner or later. “Many Canadians like to take advantage of these pensions as soon as they can,” Coutts says. “But here’s the deal: The government will pay you more if you wait.”
Before diving into the dollar amounts and advantages of delaying your CPP and OAS, let’s look at how they work.
Government pensions and how they work
How do CPP and QPP work? During your working years, you give the CPP a share of your earnings with each paycheque. Your employer matches your contributions, until you reach an annual limit. If you’re self-employed, you have to pay the employer’s share as well as your own. Some of this money goes to those who are now getting a pension. CPP administrators pool and invest the rest to provide a reserve. You can start collecting a reduced pension as early as your 60th birthday.
How does OAS work? Unlike CPP and QPP, the money for OAS comes out of general tax revenue. That means you don’t have to pay into it. To get OAS payments, you must have lived in Canada for at least 10 years after the age of 18. How much you’ll get depends on how long you’ve lived in Canada. So the longer you’ve lived in Canada, the more you’ll get. You reach the maximum after living here for 40 years.
Next, let’s look at it how these pensions could play out in your future.
How much could you get from CPP and OAS?
“Most people are surprised at how much they’ll get through government benefits,” Coutts says. “For instance, if you take CPP at age 65, you could get a maximum of $1,154.58 per month, as of 2019. And, if you’re collecting the maximum OAS, you can add $601.45 per month, as of March 2019.”
And remember to count CPP and OAS payments to your spouse or common-law partner. That payment will depend on how much he or she has paid into CPP and has lived in Canada.
“That’s guaranteed income for the rest of your life, indexed to inflation – adjusted to the cost of living,” Coutts explains. This could be a fairly significant portion of your retirement income before you’ve even considered other sources. (More on this later.)
IMPORTANT NOTE: Although it’s common to get the maximum OAS payment, most Canadians don’t get the maximum CPP/QPP. That’s because they haven’t earned enough or worked long enough. When you’re roughly estimating your retirement income, it may be more helpful to build in the average CPP/QPP payment. For example, the average monthly payment for 65-year-olds who started to draw CPP/QPP in October 2018 was $664.41. That’s $7,972.92 a year. When you get close to retiring, you can use the Canadian Retirement Income calculator. It will give you a more accurate estimate of your CPP/QPP income.
- Want a quick estimate of your monthly CPP/QPP income? Try this calculator.
How much CPP will you get at age 60?
“For every month before your 65th birthday, you’ll get .6% less than what you would have received if you had collected CPP at 65,” Coutts says. If you do the math, you’ll find that you’re getting 7.2% less every year (.6 x 12) for five years. That’s a 36% reduction (7.2 x 5) in total.
What happens if you take CPP at age 70?
For every month after age 65, you gain .7% for CPP, which amounts to an annual rise of 8.4% (.7 x 12). “The furthest you can delay CPP is age 70,” Coutts says. “If you wait until then, you’ll get 42% more than what you would get at 65.”
What happens if you take OAS at age 70?
While you can’t get OAS payments before age 65, you can put them off until you’re 70. “You’ll get .6% more for every month you delay receiving OAS,” Coutts says. That amounts to a 7.2% annual rise and a 36% boost in total. You’ll get no further increase by delaying either CPP or OAS past 70.
How does the OAS clawback work?
If you make over $77,580 a year in 2019 while you’re getting OAS, you may have to repay some, if not all, of it. The government calls it the “pension recovery tax,” but it’s commonly known as the OAS clawback. “Not too many Canadians are likely to make more than $70K a year in retirement,” Coutts says. “But if you’re generating a lot of income in your 60s and beyond, I’d recommend working with an accountant or an advisor. Together, you can look for ways to spread out your income and avoid being in a clawback position.”
How long does it take to receive CPP after applying?
“You have to apply online to get CPP and OAS pension payments,” Coutts says. “The process to have your application approved by the government may take up to four months.”
Right now, you have to apply to get CPP. But according to its 2019 budget, the federal government plans to make applying for CPP automatic at age 70. This will help Canadians who don’t know they can get CPP, or forget to apply for it.
Can you afford to delay your CPP and OAS benefits?
Now that you’ve seen the numbers, one thing probably stands out: The longer you wait for CPP and OAS, the more you’ll get. “Say you only wait for one year, till you’re 66. Then your CPP benefit will be 8.4% higher and your OAS benefit will be 7.2% greater,” Coutts says. “That’s still an attractive rate of return. And it’s money that will be locked in for the rest of your life.”
What if you keep working while you’ve postponed collecting CPP and OAS? Then you also get more time to add to your retirement savings, and less time that you will need your savings to last.
Playing the waiting game clearly pays off, but can it work for you? A lot of the decision depends on your health and your other sources of retirement income. Before you dip into your government benefits, Coutts recommends asking yourself these questions:
How healthy are you? “If you’re healthy and expect to live a long life, then chances are you’ll be paying less in health-care costs in the early years of your retirement. So you might not need these pension payments right away,” Coutts says. “In which case, I recommend trying to wait out CPP and OAS for as long as you can.”
- How long do you think you might live? Try this calculator to get an estimate and to see what you can do to live a longer, healthier life.
- Retirement planning: How to be ready to live to 100
Do you have other sources of retirement income? Retirement doesn’t mean relying on a single source of income. “Try to put your government benefits on the back burner,” Coutts recommends. “Think of other types of retirement income you might have.” For example, maybe you’ve got money growing in an RRSP or a tax-free savings account (TFSA). Or, you have a company pension plan to rely on. Perhaps you’ll choose to semi-retire and work freelance. These are all choices you can make to help fund your retirement before you tap into CPP and OAS.
Do you need the money earlier? Collecting on CPP and OAS benefits sooner means you’re taking a little less now instead of waiting for more later. But it’s still a choice if you need it. And you may simply want to enjoy your money while you’re younger and potentially in better health. “Everyone’s financial situation is different. And, if you absolutely need the money early on, then go ahead and take it,” Coutts says. “But if other income sources can help cover your health expenses and cost of living for the first few years, then you’re better off delaying.”
Talk to an advisor
Need help figuring out when to dip into your government benefits? "A lot of planning goes into retirement funding," says Coutts. "It really helps if you're working with an advisor who can explain all your options and give you an idea of how much income you could potentially earn through all your savings and pensions."