Deciding the right time to start your Canada Pension Plan (CPP) and Old Age Security (OAS) benefits is essential for maximizing your retirement income and reducing taxes. The timing can significantly impact how much money you receive and how much you pay in taxes over your retirement years.

 

Both CPP and OAS provide flexibility in when you start collecting:

• CPP can be taken as early as age 60 or delayed until age 70. For every month you delay past 65, your CPP increases by 0.7%, adding up to a 42% increase at age 70.
• OAS normally starts at age 65 but can be deferred until age 70. Deferring OAS boosts your payments by 0.6% per month, or 7.2% per year, for a maximum increase of 36% at age 70.

 

Why You Should Consider Delaying CPP and OAS:

1. Maximize Lifetime Income and Protect Against Longevity Risk

Delaying increases your guaranteed monthly income, which can be especially beneficial if you expect to live into your 80s or beyond. Since these benefits are indexed to inflation, they maintain their purchasing power over time.

2. Minimize Taxes

If you continue working or have high taxable income early in retirement, delaying CPP and OAS can help reduce your overall tax bill by pushing benefit payments into years when your income might be lower.

3. Avoid OAS Clawback

OAS payments are reduced if your net income exceeds a certain threshold (over $90,000 as of 2024). By delaying OAS until your income drops below that amount, you can prevent or reduce this clawback and receive the full benefit.

 

When Does It Make Sense to Delay?

• You plan to work past 65 or have other high sources of income.
• You have enough savings to cover expenses until you start receiving CPP and OAS at age 70.
• You want to secure the maximum, inflation-protected lifetime income possible.
• You wish to reduce or avoid the OAS clawback.
• You intend to draw down taxable savings (like RRSPs or RRIFs) before starting CPP/OAS to keep your taxable income low.

 

When Might You Start CPP and OAS Early?

• You need the income immediately after retirement.
• You have health concerns or a shorter life expectancy.
• You have fewer years of Canadian residency and may not qualify for full OAS.
• You believe your investments will generate better returns than the increase gained from delaying benefits.

 

Break-Even Age for Delaying CPP/OAS:

• CPP (starting at 70) provides about 42% more monthly benefit than starting at 65.
• OAS (starting at 70) gives up to 36% more monthly benefit.
• The break-even age where total benefits received catch up to what you would have gotten if you started earlier is usually in the early 80s.

 

Tax Strategies to Pair with CPP/OAS Timing:

• Withdraw from your RRSP or RRIF before starting CPP and OAS to smooth out your taxable income.
• Use your TFSA and non-registered accounts early in retirement to reduce taxes and preserve benefits.
• After age 65, consider pension income splitting with your spouse to lower your combined tax bill.

 

The Bottom Line:

 

Delaying CPP and OAS benefits until age 70 generally leads to higher monthly income and potential tax advantages, especially for those in good health with sufficient savings. However, individual circumstances vary, so consider your health, financial needs, and tax situation carefully. Consulting a financial advisor can help tailor the best timing for your retirement income plan.