Overview
This episode explains how the Canada Pension Plan (CPP) and Old Age Security (OAS) work, the timing options for starting benefits, and the financial, tax, and planning implications of early versus delayed commencement. Key nuances, common mistakes, and practical strategies are highlighted to help retirees optimize their retirement income.
CPP Program Structure and Contributions
- The CPP is a contributory retirement program; benefits depend on the amount and duration of contributions.
- Contributions start at age 18 and end when you start receiving CPP, turn 70, or die.
- Low-earning years may be excluded via general dropout and child-rearing provisions, improving benefit calculations.
- Disability periods are not counted as low earnings, ensuring fair retirement benefits.
- In 2025, contributions apply to earnings from $3,500 up to $71,300; an additional layer applies for $71,300–$81,200.
- Contribution rate is 11.9% split equally between employer and employee; self-employed pay the full amount.
CPP Benefits and Timing
- Maximum monthly CPP payment in 2025 is $1,433, but the average is much lower for new beneficiaries.
- Benefits may commence as early as age 60 (with a 36% reduction) or as late as 70 (with a 42% increase).
- Post-retirement benefits are available for those still working and contributing between ages 60–70.
- Survivor, death, disability, and children’s benefits may also be available under specific conditions.
OAS Program Structure and Eligibility
- OAS is based on Canadian residency, not contributions.
- Full OAS requires 40 years of Canadian residency after age 18; partial benefits available with 10–39 years.
- Maximum OAS payment for ages 65–74 is $713; ages 75+ is $784/month in 2025.
- OAS can be delayed up to age 70 for increased payments (up to 36% higher).
- OAS and related benefits are taxable and subject to clawback for high-income seniors.
- International agreements may help meet residency requirements for Canadians living or working abroad.
Guaranteed Income Supplement (GIS) and Related Benefits
- GIS offers non-taxable payments to low-income OAS recipients aged 65+.
- Eligibility and payment amounts depend on income and marital status.
- Allowances exist for spouses/partners aged 60–64 and survivors with limited income.
Early vs. Delayed Benefit Considerations
- Early benefit commencement can provide needed income, psychological comfort, and flexibility for those with poor health or immediate financial needs.
- Delaying CPP/OAS increases guaranteed, inflation-indexed income and is typically better for those with longer life expectancy or seeking to optimize tax and clawback strategies.
- Delayed benefits help hedge longevity risk and can reduce investment management needs in later years.
Common Mistakes to Avoid
- Taking CPP/OAS too early without analysis can result in irreversible, lower lifetime income.
- Triggering OAS clawbacks due to poor income planning leads to lost benefits.
- Failing to coordinate spousal benefits can reduce tax efficiency and flexibility.
- Underusing TFSAs results in missed opportunities for tax-free growth and income.
Recommendations / Advice
- Consult a certified financial planner before deciding when to start CPP/OAS.
- Analyze your health, expected longevity, income sources, and tax situation.
- Use RRSP withdrawals, income splitting, and TFSA contributions strategically.
- Coordinate retirement planning with your spouse for tax and income optimization.