It’s a major change in the Canadian pension landscape: old-age security (OAS) benefits will soon kick in at age 67 rather than at age 65. And although many of your older clients will not be affected, due to the lengthy phase-in period, others will be asking how the new rules will affect their retirement.
The revised OAS eligibility age, which also applies to the guaranteed income supplement (GIS), will seriously affect some clients. The greatest impact will be felt by low-income people, particularly those who are disabled. The federal government has said it will compensate the provinces for any additional income support that they will have to provide as a result of the changes. But how much that will be is not clear.
Still, for most Canadians, the adjustment should be manageable. Some clients may choose to work longer. Some may choose to take more from their RRSP at age 65 and 66 to make up for the lost income. Some may want to save more in the interim to make up for the gap. Whatever the choice, there is lots of time for planning.
Canadians who were born before April 1958 – those who were 54 on the date the change was announced – aren’t affected. The change will be phased in over four years, starting in 2023. Those born in April and May of 1958 will start getting OAS at age 65 and one month, while those born in December 1961 or January 1962 won’t get theirs until they are 66 and 11 months.
OAS currently provides up to $545 a month and the GIS provides up to $739 a month for people with taxable income less than $16,512. Both benefits are currently indexed quarterly to inflation.
If your clients want to make sure they have an income at ages 65 and 66 that is equivalent to what OAS would have provided, they can do so by saving a bit extra each month. The exact amount depends on the age of the client, assumptions about average return and inflation, and which investment vehicle is used.
Take the example of a client born in February 1962. If you assume that inflation will average 3% a year (with OAS indexed to that rate) and the money saved is in a no-interest savings account, the client will need $21,662 to make up for the lost benefits. That works out to $116 a month, says David Ablett, director of tax and estate planning with Investors Group Inc. in Winnipeg
If the extra savings is put into an RRSP with an average return of 5%, only $75 a month needs to be saved. If it’s put in a tax-free savings account with the same return, the client would need to save $53 a month if the projected tax rate at ages 65 and 66 is 30%. The required amount would rise to $64 a month if the client’s tax rate will be 15% because the after-tax benefit is higher in the lower tax bracket.
Taking the equivalent amount out of an RRSP at age 65 is also an option. Indeed, some clients probably should do so, says Jerry Rubin, vice president, wealth planning group, with CI Private Counsel LP in Winnipeg. If the absence of OAS means the client is in the lowest tax bracket at ages 65 or 66, it makes sense to take money out of RRSPs to get the taxable income to just below the threshold for the next tax bracket.
These calculations assume there aren’t further changes in OAS eligibility or benefits. Ablett doubts there will be. But if there is, they are likely to involve lowering the taxable income at which the benefits are clawed back. Or the government may decide to increase the clawback.
It’s difficult to predict the likelihood of such changes, Rubin says. But his firm will do financial plans for clients that don’t include government benefits – done to make sure that clients will be secure if these benefits drop or disappear.
Adrian Mastracci, president and portfolio manager with KCM Wealth Management Inc. in Vancouver, thinks there could be further raising of the eligibility age and suggests assuming no OAS until age 70. IE
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