Thinking about retirement can be overwhelming even for the most financially savvy among us. It’s easy to avoid conversations about money, especially when it comes to a time way off in the distant future. The more you understand about retirement income now, the better off you’ll be when the time comes. The Government of Canada provides one of the best retirement income plans of any country in the world. CPP Payments (Canada Pension Plan) and OAS (Old Age Security) contribute to rounding out one’s income in retirement. The amount you will receive for both these plans will vary depending on the age you decide to start receiving them.
Here’s what you should know about retirement pensions in Canada.
What is OAS?
Old Age Security is the guaranteed income all Canadians receive at age 65. To qualify for the maximum amount, you must live in Canada for 20 years between the ages of 18 and 65. If you haven’t lived in Canada for 20 years you can still qualify for it—but the amount you receive will be reduced. In this case, you must be age 65 or older and have lived in Canada for at least 10 years. You must also be a Canadian Citizen or permanent resident when your application is approved. The current maximum monthly payout is $666.83. At 75 years of age, that amount is increased to $733.51. To receive OAS, your annual income must be less than $129,757.
When can you access OAS?
You can access OAS at 65, but some choose to defer payment until 70. The amount you will receive grows by 0.6 percent for each month (until age 70) if you chose to wait. There is no benefit to deferring payments after age 70.
What is CPP?
The Canada Pension Plan is a retirement income plan that you and your employer pay into throughout your working life. For each paycheck you receive, you will see a deduction for CPP—this is money that you will get back when you retire. You pay half of this deduction, while your employer pays the other half (unless you are self-employed, in which case you pay the full amount).
The maximum CPP contribution one can make yearly is $3500 and the yearly maximum pensionable earnings for 2022 is $64,900. The average monthly amount current pensioners receive is $702.77—while the maximum amount possible to receive is $1253.59. The amount you receive depends on your contribution rate during your working life. You can sign into your Canada Revenue Agency account via Service Canada to find out exactly how much you have accumulated so far.
When can you access CPP?
While the average age to receive payments is 65, you can access your CPP retirement pension as early as 60. This will incur a penalty of 0.6 percent for each month you receive a payment before 65. If you decide to wait until after 65, you will receive an increased benefit of 0.7 percent for each month until 70, to a maximum of 42 percent more.
Benefits of accessing OAS and CPP benefits later
Accessing OAS later means you will receive more once you do start receiving the benefits payment. Each month of deferral from age 65 to 70 will increase your payment by 0.6 percent, to a maximum of 36 percent.
Accessing the CPP benefit later means you will receive an increased benefit of 0.7 percent for each month you deferred, to a maximum of 42 percent.
Benefits of accessing OAS and CPP benefits earlier
The main benefit of accessing OAS at 65 is that if you need the money to maintain your lifestyle, you have it. If you have a health condition or family history that can lead to a shorter lifespan, it makes sense to take it sooner rather than waiting. It also means you will be eligible for the Guaranteed Income Supplement, which those deferring do not have access to.
Accessing CPP payments earlier has similar benefits. If a medical condition could lead to a shorter lifespan or if you need the money to maintain quality of life, it may make sense to take it earlier. It does come with a financial hit, reducing your overall payments by 0.6 percent for each month you receive it before age 65.
When should you take OAS/CPP?
Depends on your financial situation.
There is no easy way to decide when to start receiving your pension benefits. You have to consider your particular financial and health situation to make an informed decision. If your current health and family history are good, consider deferring payments. On the other hand, if you need the money to maintain your quality of life, or your health isn’t ideal you might consider taking them earlier. Even despite the penalty. Don’t forget to take into account your spouse or common-law partner as well. Their financial situation will affect your payments and entitlements.
Talk with an expert
The best way to make the correct decision for you is to talk with a financial expert who will ensure you have all options accounted for. A financial planner will walk you through all the various pros and cons while considering your health and lifestyle factors.
When you have all the factors accounted for, it will be easier to make the right decision on when to start receiving OAS and CPP payments. It’s important not to rush the decision, but being aware of how the system works well ahead of time will help ensure you make the best decision for you. It might make sense to wait if you can wait, but if you can’t, you shouldn’t force yourself to keep working. The support is there, so don’t hesitate to take it when you need it.
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