As vaccines prove effective and the COVID-19 pandemic begins to subside, offices are starting to open again. People who have been working from home for months are heading back to the office. But what if you were already thinking about retiring? The very thought of commuting again might make retirement look better than ever.
So how will you support yourself after you retire? The balance in your savings account or your 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. There are public pensions designed for Canadians who are no longer working, including:
- Canada Pension Plan (CPP)
- Quebec Pension Plan (QPP)
- Old Age Security (OAS)
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 retirement income,” he says. “Or they underestimate their value. Then they realize that these benefits alone could potentially pay up to $20,000 per year, per person. Knowing that can make you feel a lot more enthusiastic about your financial future.”
How can you get the most out of CPP and OAS?
It all comes down to timing. As you approach your retirement, you’ll need to decide 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.”
In this article, we’ll answer your top questions about CPP/QPP and OAS:
- How do CPP and QPP work?
- When can you collect CPP or QPP?
- How does OAS work?
- How much could you get from CPP and OAS?
- How much CPP will you get at age 60?
- What happens if you take CPP at age 70?
- Can you collect OAS at age 60?
- What happens if you take OAS at age 70?
- How does the OAS clawback work?
- How do you apply for CPP and OAS?
- How long does it take to get CPP after applying?
- Can you afford to delay your CPP and OAS benefits?
- Need help figuring out when to dip into your government benefits?
How do CPP and QPP work?
During your working years, you give the CPP/QPP 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. Administrators pool and invest the rest to provide a reserve.
When can you collect CPP or QPP?
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 past age 18.
It’s important to note that both CPP and OAS payments are taxable income.
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 start CPP at age 65 this year, you could get up to $1,203.75 per month. And, if you’re collecting the maximum OAS, you can add $618.45 per month, as of June 2021.”
And remember to count CPP and OAS payments to your spouse or common-law partner.
“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 January 2021 was $619.75. That’s $7,437 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?
Your monthly payment will be reduced for every month early that you start taking CPP. “For every month before your 65th birthday, you’ll get .6% less than what you would have received if you had started collecting CPP at 65,” Coutts says. If you do the math, you’ll find you’re getting 7.2% less every year (.6% x 12). So, by taking CPP five years early, you’re looking at a 36% reduction (7.2 x 5) in total.
What happens if you take CPP at age 70?
For every month you wait after age 65, your CPP payment grows by .7%.That 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 per year than what you would have gotten at 65.”
Can you collect OAS at age 60?
While you can't get OAS payments before age 65, you can put them off until you’re 70.
What happens if you take OAS at age 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 a certain amount while you’re getting OAS, you may have to repay at least part. In 2021, that repayment threshold is $79,845. 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 $75K a year in retirement,” Coutts says. “But you might be generating a lot of income in your 60s and beyond. In that case, 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 get CPP after applying?
“The process to have your application approved by the government may take up to four months,” Coutts says.
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 you’ll need your savings to last a shorter time.
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 three questions:
1. How healthy are you?
“Suppose you’re healthy and expect to live a long life. 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.”
2. 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. Note also that once you start drawing CPP and OAS, you can’t stop.
3. Do you need the money earlier?
Collecting CPP and OAS benefits sooner means taking a little less now instead of waiting for more later. But it’s still an option 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 other income sources might be enough to cover your health and living expenses for the first few years. In that case, you’re better off delaying.”
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. That way, you can understand all your options. And then you’ll have an idea of your potential income from all your savings and pensions."
- Most advisors now offer to meet Clients virtually by video chat. Find an advisor.
This article is meant to only provide general information. Sun Life Assurance Company of Canada does not provide legal, accounting, taxation, or other professional advice. Please seek advice from a qualified professional, including a thorough examination of your specific legal, accounting and tax situation.