When you reach retirement, you might start receiving the Old Age Security (OAS) pension. It’s a monthly payment the Canadian government gives to seniors to help them with their living expenses. But if you make too much money, the government might ask you to pay back some or all of that pension. This is called the OAS clawback or the OAS pension recovery tax. Let’s break down how the OAS clawback works, how it will change in 2025, and what you can do about it.
What is the OAS Clawback?
The OAS clawback happens when your yearly income is above a certain limit, called the threshold. If you make more than this threshold, the government will take back part of your OAS pension as a tax. They do this monthly, meaning your OAS payments get smaller the more you earn over the threshold.
Here’s an example: In 2023, if your income is over $86,912, you start paying back part of your OAS. The more you earn above this amount, the more you’ll have to pay back until your entire OAS is clawed back.
So, if you earn $87,000 or more, you’ll pay some OAS back. But if you earn way above the threshold, like $150,000, you might have to repay all of your OAS.
What Happens If You Delay OAS Until Age 70?
You can start receiving your OAS at age 65, but if you wait until age 70, the government will give you bigger monthly payments. This means that for each month you delay past 65, your OAS grows. By the time you turn 70, you’ll be getting a lot more than you would have if you started at 65. This increase is meant to reward you for waiting.
However, even if your OAS payments are bigger, you still have to watch out for the clawback if your income is high. The more income you have above the threshold, the more OAS you’ll have to pay back, even with the larger monthly payments.
How Will the OAS Clawback Change in 2025?
The clawback thresholds change a little bit every year to keep up with inflation and rising costs of living. In 2025, the income limit will go up, so you can earn a bit more before the clawback starts. Here’s what it will look like:
- If you’re between 65 and 74, you will start to pay back your OAS if your income is more than $90,997.
- If you’re 75 or older, you’ll only start to pay back your OAS if your income is more than $148,451.
The government reviews your income each year and sets the clawback amount for the following year. So, for the clawback in 2025, they will look at what you earned in 2024.
How Does the OAS Clawback Work?
The OAS clawback is applied as a monthly tax, so instead of paying it all at once, your OAS pension payments will get smaller each month. If you’re way over the threshold, you might see a big reduction in your monthly OAS payment. And if you earn a lot more than the maximum, you could even lose your OAS for that year.
What is the Old Age Security Recovery Tax?
The clawback is also called the Old Age Security pension recovery tax. Here’s how it works:
- You’ll have to repay part or all of your OAS if your income is more than $86,912 in 2023.
- If you live in a country where the tax on Canadian pensions is 25% or more, you will also have to pay this tax, even if your income isn’t as high.
The government looks at your income and decides if you owe this tax. For example, if your annual net world income (this includes all money you earn in Canada and other countries) is more than the threshold, they will reduce your OAS.
Example for 2025:
If your income in 2024 is:
- More than $90,997 (for ages 65-74), or
- More than $148,451 (for ages 75+),
Then you’ll pay back some of your OAS starting in July 2025.
How Can You Avoid the OAS Clawback?
It might seem tough to avoid the clawback, but there are some things you can do to lower your income and keep more of your OAS:
- Manage Your Income: If you know you’re getting close to the clawback threshold, you can try to lower your income by spreading it out over different years. For example, you might delay cashing in certain investments or receiving large bonuses.
- Income Splitting: If you have a spouse, you can try to split your income with them. This helps reduce your income for tax purposes and could help you avoid hitting the clawback limit.
- Delay Your OAS Pension: If you wait until age 70 to start your OAS, you’ll get more money every month. This could help make up for the clawback, even if you end up paying some of it back.
- Work with a Financial Planner: A financial planner can help you create a strategy to keep your income below the clawback threshold and make the most out of your OAS.
Take Action for a Worry-Free Retirement
The OAS clawback can seem confusing, but with the right planning, you can manage your income and reduce its impact. If you’re concerned about how the clawback could affect your retirement, now is the time to take control of your financial future.
Book an appointment today with a financial planner to help you make the best decisions for your retirement. Get personalized advice on managing your OAS, taxes, and overall retirement income strategy.
And if you want to dive deeper into retirement planning, don’t forget to purchase “The Art of Retirement” – a comprehensive guide that will help you master the key steps to building the retirement of your dreams. Learn about creating income, making smart financial decisions, and avoiding common mistakes along the way.
Click here to book your appointment and order your copy of “The Art of Retirement” today!
