Changes to OAS and GIS and Their Effect on Retirement
At the end of March 2012, millions of Canadians who were born on or after Feb. 1, 1962 woke up to the new reality of a changed retirement landscape and the prospect of having to work an additional two years before being entitled to their Old Age Security (OAS) and Guaranteed Income Supplement (GIS) benefits.
According to the government , the new changes will help adapt the program to the changing demographics of the country and ensure its future sustainability; and if these changes were not made, OAS would have soared in size and cost — from 4.7 million recipients (costing $36.5 billion) in 2010 to 9.3 million people (costing $108 billion) in 2030.
What are OAS & GIS Supplement Benefits?
OAS is one of the pillars of Canada’s public pension system and is funded entirely by government revenues. Currently it is available to any Canadian citizen or permanent resident who is 65 years old and has lived in the country for at least 10 years. You will receive the full pension if you have lived in Canada for at least 40 years since you turned 18. If you have lived in Canada for less time than that, you may qualify for a partial pension.
The full OAS benefit is $546 per month in the first quarter of 2013.
If you are a high-income senior, your Old Age Security pension may be reduced. OAS benefits are reduced by 15 per cent of the amount by which a pensioner’s individual net income is above a set limit ($70,594 in 2013). The full pension is eliminated when a pensioner’s net income is $114,640 or more.
Currently about 5 per cent of Old Age Security pensioners have their benefit reduced and only 2 per cent lose the full benefit.
The Guaranteed Income Supplement provides a monthly non-taxable benefit to low-income Old Age Security recipients living in Canada. The maximum benefit amount in the first quarter of 2013 is $740 per month for a single or divorced pensioner and $490 per month for pensioners who are married or common-law partners. The benefits will be reduced based on income. Single pensioners with incomes over $16,560 and pensioners who are married or common-law partners with incomes over $21,880 do not qualify for GIS benefits.
Changes to OAS and GIS Benefits
The changes to OAS and GIS benefits that were proposed in the 2012 budget will not be immediate. There will be an 11-year notification period, followed by a six-year phase-in period, to ensure that individuals have ample time to make adjustments to their retirement plans.
The eligibility age will be increased gradually from 65 to 67 starting in April 2023. The change will be fully phased in by January 2029. If you were born on or after Feb. 1, 1962 you will be fully impacted by this measure. However, if you are 54 years of age or older as of March 31, 2012 this measure will not affect you. If you were born between April 1, 1958 and January 31, 1962, you will have an eligibility age between 65 and 67.
These changes will apply equally to the allowance and survivor’s allowance that are currently paid to qualifying individuals between the ages of 60 and 64. The eligibility age for these benefits will increase by two years, to ages 62 to 66 and these benefits will be subject to the same notification and phase-in periods.
The government will also ensure that other federal programs that provide income support until age 65 are aligned with the new OAS program rules and do not cause an income gap at ages 65 and 66.
Proactive Automatic Enrollment for OAS and GIS
The good news is that a proactive automatic enrollment program for both OAS and GIS recipients will be phased in from 2013 to 2015. This should eliminate the need for having to complete application forms for these benefits in the future.
You Can Defer OAS Starting in July
Effective July 1, 2013, a new Old Age Security (OAS) deferral option takes effect that will allow you to defer receiving OAS for up to five years. Similar to the Canada Pension Plan, deferring receipt of OAS will result in a higher actuarially determined benefit.
For each month that you defer receiving your OAS payments, a premium of 0.6 per cent will be added to the pension. This works out to an increase of 7.2 per cent for one year of deferral and as much as 36 per cent if you elect to defer receiving your OAS payments for a full five years.
The 2012 budget papers that introduced this measure provided an example that assumes an annual OAS benefit of $6,481. Deferral by one year would result in an annual benefit of $6,948, while a five-year deferral would result in an annual benefit of $8,814. It should be noted that this actuarial adjustment would not apply to GIS benefits.
What is the Ideal Age to Begin OAS?
According to Doug Carroll, vice president of tax and estate planning at Invesco Canada, in an article published in the November 2012 issue of the Advisor’s Edge Report (page 20), “…it appears that a 65-year-old who expects to live past age 82 will draw more OAS dollars by deferring to age 70.”
There are other complicating factors that need to be taken into consideration too, such as the threshold at which OAS gets clawed back ($70,954 in 2013), federal and provincial age credits and the GST/HST credits.
Doug Carroll goes on to say that “it’s worth analyzing the effects of deferring OAS pension in favour of earlier or larger RRIF withdrawals. Potential benefits include:
People not yet drawing any RRIF income can claim the pension credit on the first $2,000 of such income;
During the deferral period, the clawback won’t apply because there is no OAS pension;
The OAS pension will be augmented for each month deferred;
The size of the RRIF will be reduced, so there’s a lower value that’s subject to the post-71 minimum withdrawal – a key culprit of clawbacks;
Even if the OAS clawback applies later, the pension itself will be larger meaning the upper threshold for full clawback will be at a much higher income level.”
Of course if you are suffering from a health issue that has the potential of shortening your life expectancy, it would be best for you to begin your OAS pension as soon as it becomes available, which would be at age 65.
The new options make retirement planning more complicated and you should definitely discuss the implications of the different options with your financial advisor before proceeding with choosing an option.
By Tina Tehranchian
Tina Tehranchian, MA, CFP, CLU, CHFC, is a senior financial planner and branch manager at Assante Capital Management Ltd. in Richmond Hill Ontario and can be reached at (905) 707-5220 or through her web site at www.tinatehranchian.com.