Don’t Get Surprised By OAS and CPP Survivor Benefits

Owen Winkelmolen

Fee-for-service financial planner and founder of PlanEasy.ca

For many retirees, CPP and OAS make up a significant portion of their retirement income. A disruption to either of these income sources can be very stressful. Even more so because this disruption follows the unexpected death of a partner or spouse.

Many retirees may not realize, but OAS and CPP survivor benefits are significantly reduced, anywhere from a 40% reduction to a full 100% reduction!

For lower income households, pension benefits like CPP and OAS can provide 50%-75% of their retirement income. For very low income households, CPP and OAS, when combined with other low-income benefits like GIS, can easily make up 100% of retirement income for some couples. Losing these benefits can be a big change to their retirement plan.

Even for higher income households, who may have significant assets in either RRSPs or TFSAs, it’s not uncommon for CPP and OAS to make up 25%-30% of their retirement income.

A disruption to this income can be devastating for some retirement plans, and what many people may not realize is the extent to which some of these benefits can be reduced when a partner passes away.

Although difficult and unpleasant to even think about, the impact of a partner passing is an important consideration for many retirement plans. It’s important to understand what changes there might be to both retirement income and retirement spending if the unfortunate were to happen.

For some plans, those which have a large amount of investment assets, the risk is smaller. Investment assets inside RRSPs and TFSAs can be transferred through spousal rollovers with no tax consequences. So, the disruption to these plans may be smaller.

But for most plans, the risk and disruption of an unexpected death can be quite large, especially in certain circumstances. In the worst-case scenario, the loss of CPP and OAS combined can represent more than $20,000 per year in lost retirement income!

 

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What Happens To CPP When A Partner Dies?

When a partner passes away CPP is reduced based on a formula but it’s also subject to a maximum amount. The result of these combined rules can often be surprising for survivors. In the best-case scenario, the partners CPP benefit will be reduced by 40%. In the worst-case scenario, the partners CPP benefit will disappear entirely. It’s important to understand which scenario you might face if the worst were to happen.

There are many factors that can influence the survivor benefit. One factor of course is how much would have been received from CPP. The CPP survivor benefit is based on what the deceased would have received at age 65.

Another factor is how old the survivor is. A survivor who is over the age of 65 could receive “60% of the contributor’s retirement pension if the surviving spouse or common-law partner is not receiving other CPP benefits”. If the survivor is under the age of 65 they could receive “a flat rate portion plus 37.5% of the contributor’s retirement pension, if the surviving spouse or common-law partner is not receiving other CPP benefits”.

Confusing, right?

And there’s more…

Notice how in the above quotes they say, “if the surviving spouse or common-law partner is not receiving other CPP benefits”? This is because a survivor who is receiving CPP will get a “combined payment” that is subject to its own rules. For example, the most a retiree can receive is the maximum retirement pension from CPP. This means the survivor pension might be reduced even further if the survivor is already close to the maximum CPP.

Here are a few examples where both partners are over the age of 65…

 

Partners At The Max

Dont Get Surprised By OAS or CPP Survivor Benefits

 

Partners Receiving A High Amount

Dont Get Surprised By OAS or CPP Survivor Benefits

 

Partners Receiving The Average Amount

Dont Get Surprised By OAS or CPP Survivor Benefits

 

 

What Happens To OAS When A Partner Dies?

Unfortunately, the impact to OAS is even more severe. When a partner passes away their OAS benefits are lost entirely. There currently is no survivor benefit for OAS.

OAS is based on residency in Canada. Someone who has lived in Canada for 40+ years prior to age 65 would be receiving an annual benefit of $7,290 (based on the latest 2019 rates). Losing that benefit will result in a $7,290 reduction in annual income for the surviving spouse, a significant reduction in retirement income.

 

 

Create A Survivor Scenario Of Your Retirement Plan

The best way to understand the impact of a partner passing is to create a survivor scenario for your retirement plan. A fee-for-service financial planner can help you understand the financial implications of these scenarios.

Along with reductions in OAS and CPP, there are other impacts we might want to be aware of as well.

For example, a survivor would benefit from the spousal rollover of RRSP assets, but this could trigger larger minimum RRIF withdrawals in the future. This might mean higher tax payments for the survivor to create the same after-tax spending.

In addition to higher taxes, these increased registered withdrawals may trigger OAS claw backs for the survivor. So not only have we lost the partners OAS but the survivor may also lose their OAS due to the claw back.

Understanding these implications can be tricky without the right advice. If you’re wondering how your plan would change in a survivor scenario then please reach out to a fee-for-service/advice-only financial planner for help. Don’t get surprised by OAS and CPP survivor benefits.

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Owen Winkelmolen

Financial planner, personal finance geek and founder of PlanEasy.

New blog posts weekly!

Tax planning, benefit optimization, budgeting, family planning, retirement planning and more...

New blog posts weekly!

Tax planning, benefit optimization, budgeting, family planning, retirement planning and more...

6 Comments

  1. Garth

    Another solid piece! Keep up the good work!

    Reply
    • Owen

      Thank you Garth! Always appreciate your comments!

      Reply
  2. Phil

    Hi Owen, great post! I have a couple of questions?

    Is oas calculated on years before 65 and (18 and over)?

    What is the (flat rate) for a younger spouse who’s not receiving cpp when a spouse who is passes away?

    Thanks

    Reply
  3. Bob Lin

    Owen, I assume that another impact on the survivor’s income would be the loss of their partner’s Federal and Provincial pension income and age amount credits.

    Lots to think about on this matter.

    Reply
    • Owen

      Hi Bob! Yes you’re absolutely right, there are a number of tax implications to consider in addition to changes in CPP/OAS. Just the loss of income splitting alone can be a big impact, not to mention the various credits that disappear, and the fact its harder to qualify for certain government benefits like GIS and GST/HST credits.

      Definitely a lot to consider. Thanks for adding your comment!

      Reply

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