Your CPP questions answered: Strategies to combine your CPP and OAS benefits

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This is the latest article in an ongoing series, Planning for the CPP, in which Globe Advisor explores the decisions behind when to take CPP benefits and reviews different aspects of the beloved and often-debated government-sponsored pension plan.

As part of this ongoing series, we invite readers to ask questions about their Canada Pension Plan (CPP) retirement benefits and find experts to answer them. This week, Rona Birenbaum, a certified financial planner (CFP) and founder of Toronto-based Caring for Clients, answers questions about combining CPP and Old Age Security (OAS) benefits:

Is it a good idea to draw down registered and non-registered assets before collecting the CPP and OAS, especially if you can wait to collect them until age 70? What are the factors to consider in this type of scenario? Would buying life insurance to cover the risk of postponing the CPP and OAS be a good idea? Does this scenario change if someone has a spouse?

As with most financial conundrums, it depends on many factors. Broadly speaking, it can make sense to use savings for living expenses and defer CPP and OAS to 70, providing:

• You will continue to have liquid investments once the CPP and/or OAS start. I’m not keen on fully depleting savings to delay to 70. Maintaining some liquidity for expenses not covered by pensions and registered retirement income fund (RRIF) minimums helps prevent debt accumulation.
• There is at least a 25-per-cent chance that you will live beyond 82, and your CPP/OAS is an important component of your retirement income. Here’s a link to a table (page 4) that can help you assess longevity probability, assuming you’re of average health.
• You prioritize inflation-indexed income security over estate maximization.

You can purchase life insurance to top up your estate for any reason, not just to cover the risk of your spouse and/or estate beneficiaries losing out due to your premature death. It’s a costly way to mitigate this risk, but an analysis can provide a cost/value perspective on the concept.

For married couples who both contributed to CPP, election timing can, and often should, differ. The overall financial picture and age difference of the couple matter here. For example, imagine someone who would earn the maximum CPP benefit and their non-income earning spouse [the only marriage for both] is 15 years younger. Delaying to 70 would maximize the pension for as long as one of them is alive. If the younger spouse lives to 90, that would be 35 years of indexed pension income at the maximum level possible. If CPP is an important component of retirement cash flow, maximizing it in this situation makes sense.

Some people say they take CPP sooner versus later so that they don’t have their OAS clawed back when other sources of income are factored in. Is it better to take less CPP for longer and have no OAS clawback, or have more CPP later and risk the clawback? What are the considerations for each scenario?

Canadians overestimate the likelihood and amount of their OAS clawback exposure. As of 2020, only 8 per cent of OAS recipients experienced a clawback.

The OAS clawback thresholds are quite high and increase annually. For 2024, clawback begins once an individual’s net taxable income is $90,997 and, depending on age, isn’t fully clawed back until net taxable income is over $142,609 for 2023. The maximum will be higher in 2024 and is even higher for those aged 75 and older.

A full planning scenario analysis is the best way to answer your questions because many factors drive taxable income throughout retirement and impact OAS clawback, not only CPP election timing.

Here are some examples:

• Tax-efficiency of non-registered investments. Many investors prefer owning equity investments that generate dividend income rather than capital gains. Unfortunately, the 38 per cent dividend gross-up required to capture the dividend tax credit inflates one’s clawback-sensitive income, whereas only 50 per cent of capital gains income is taxable. A greater emphasis on capital gains is more tax efficient and provides investors with more control over the tax year when the income is realized. Non-registered prescribed annuities provide high cash flow and low taxable income and on their own can eliminate OAS clawback for some retirees.
• Using tax-free savings account (TFSA) withdrawals strategically can protect OAS income. The withdrawn amount can be returned to the TFSA when RRIF income kicks in and exceeds one’s spending requirements or from an inheritance or equity takeout when downsizing or selling one’s principal residence.
• Selling an investment at a profit? Consider selling before the end of the calendar year you intend to start collecting OAS benefits so that the capital gain income isn’t part of the clawback calculation when you apply. Careful, though; it may be better, overall, to spread the gain over two tax years even if you lose some OAS temporarily.

We’ve had a lot of success reducing exposure to the OAS clawback through strategic drawdown and pension election strategies. Annual monitoring and tweaking of the withdrawal plan is needed to get the best results over time. A professional CFP can test out a variety of scenarios to find a “sweet spot” strategy that makes your money and government benefits go furthest.

Implementing the strategy and adjusting over time is a hands-on activity, whether you manage it on your own or with the help of a dedicated and knowledgeable, planning-oriented investment advisor.

Editor’s note: A previous version of this story stated incorrectly that charitable donations reduce income for OAS eligibility. Charitable donations generate a tax credit, not a deduction against income. The article also stated incorrectly the dividend gross-up was 30 per cent. It should have said 38 per cent.

If you have any CPP questions, please e-mail us at globecpp@gmail.com and we will try to answer as many as possible in the next few weeks. Answers will appear on Tuesdays.

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