Should you apply for OAS even with a high income?

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    A friend told me to apply for OAS immediately, even though everything is reclaimed. I’m concerned about the tax consequences.

    —Greg

    Old-age security (AHV) can begin as early as age 65 or be deferred until age 70. For each month of deferral, the pension increases by 0.6% (7.2% on an annual basis). To be clear, that doesn’t mean there’s a 7.2% return if you defer OAS. You give up one year of retirement in order to receive a 7.2% higher lifetime pension.

    If you look at the cumulative pension payments from the AHV, if you postpone it by one year, you will have catching up to do in the next 13 years. In other words, if you defer your OAS to age 66, it will take until age 78 before you get more cumulative OAS than if you start at age 65.

    If you defer your OAS to age 70, it would only take you 11 years until you’re 81 to catch up on the cumulative payments, but you’re getting that much older and also have less time to catch up.

    There is a time value for money, so getting a dollar today is better than getting a dollar next year. That’s because you can invest that dollar or not take so much of your other investments and keep them invested. As a result, depending on the assumptions used, you may have to live well into your 80’s to be better off once you have deferred OAS.

    When will OAS be reclaimed?

    For a high earner like you, Greg, there’s no incentive to start retirement early. That’s because it’s means-tested, with a partial pension cut for those whose net income exceeds $81,761, with a full payback if income exceeds $133,141. This payback, or clawback, is calculated at 15 cents for every dollar your income exceeds the lower end of this threshold.

    With an income of $200,000, you would be well above the high end of the threshold. A high-income 65-year-old should probably consider deferring their OAS until their income falls, or until age 70.

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