The Old Age Security (OAS) pension is a vital source of income for Canadian seniors, designed to support living expenses in retirement. However, higher-income earners may face the OAS clawback, also known as the OAS pension recovery tax. Let’s explore how the clawback works, the changes coming in 2025, and strategies to safeguard your retirement income.
Table of Contents
What is the OAS Clawback?
The OAS clawback is a reduction in your monthly OAS pension payments when your income exceeds a government-set threshold. It ensures that higher-income retirees contribute back to the system while prioritizing support for those with lower incomes.
How It Works
- For every dollar of income above the threshold, 15 cents is deducted from your OAS payments.
- If your income significantly surpasses the maximum threshold, you could lose the entire OAS benefit for the year.
OAS Clawback Thresholds for 2025
The OAS clawback thresholds are adjusted annually to reflect inflation and cost-of-living changes. Here’s what you need to know for 2025:
- Minimum Income Threshold: $93,454
- Maximum Recovery Threshold:
- Ages 65–74: $151,668
- Ages 75 and over: $157,490
If your income exceeds the minimum threshold, your OAS benefits will be reduced by 15% of the excess. Once your income surpasses the maximum threshold, you won’t receive OAS payments for that year.
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Delaying OAS: Is It Worth It?
You can start receiving OAS at age 65, but delaying until age 70 increases your monthly payments. For each month you wait, your OAS benefit grows, offering a higher payout in the long term.
However, even with larger payments, high-income earners should remain cautious. The clawback still applies, and delaying OAS won’t shield you if your income exceeds the threshold.
Example: How the Clawback Affects Your OAS
Scenario
- Age: 68
- Annual Income: $120,000
- OAS Entitlement: $8,000/year
Calculation
- Excess Income: $120,000 – $93,454 = $26,546
- Clawback Amount: $26,546 × 0.15 = $3,981.90
- Adjusted OAS: $8,000 – $3,981.90 = $4,018.10/year
- Monthly Payments: $4,018.10 ÷ 12 = $334.84
If the income exceeds $151,668, the entire $8,000 OAS benefit would be clawed back.
Strategies to Reduce the OAS Clawback
1. Manage Your Income
Spread taxable income across multiple years to stay below the clawback threshold. For instance, you can defer bonuses or stagger investment withdrawals.
2. Income Splitting
If you’re married or in a common-law partnership, split pension income with your spouse to reduce your taxable income.
3. Delay OAS Payments
Waiting until age 70 to start OAS increases your monthly benefit, helping offset the impact of a partial clawback.
4. Maximize Tax-Deferred Accounts
Use Registered Retirement Savings Plans (RRSPs) or Tax-Free Savings Accounts (TFSAs) to grow your wealth while keeping taxable income lower.
5. Consult a Financial Planner
A financial planner can create a personalized strategy to optimize your retirement income and minimize the clawback.
FAQs About the OAS Clawback
What is the OAS Recovery Tax?
The OAS recovery tax is another term for the clawback, applied as a monthly deduction to your OAS payments when your income exceeds the threshold.
Does the Clawback Apply to All Income?
Yes, it applies to your net world income, which includes earnings from Canada and other countries.
Can I Avoid the Clawback if I Live Abroad?
Not necessarily. If you reside in a country where Canadian pensions are taxed at 25% or higher, the recovery tax still applies regardless of your income level.
Take Control of Your Retirement
The OAS clawback can feel like a setback, but strategic planning can help you preserve your retirement income. Here’s how to get started:
- Work With a Financial Planner: Professional advice ensures your financial decisions align with your goals.
- Delay Payments Wisely: Evaluate whether postponing OAS can maximize your benefits.
- Use Smart Tax Strategies: Optimize your withdrawals and contributions to avoid triggering the clawback.
Don’t let the OAS clawback disrupt your financial security. Start planning today to manage your income, maximize your benefits, and enjoy peace of mind in your retirement years.
Take control of your future today and secure the retirement you deserve!
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