Never overlook a pension buyback

Catch up on missed pension contributions after a maternity or other extended leave

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From the November 2014 issue of the magazine.

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(iStock)

(iStock)

If you missed out on contributing to your company’s pension plan while you were on maternity leave or sabbatical, there’s a way to catch up. Most defined benefit pension plans will let you “buy back” the years you missed, so you can get the pension you would have received if you’d never taken the time off. Is it worth the money? In most cases, the answer is yes.

“The issue is whether the cost you have to pay now is going to be worth the extra years of pension,” says retirement expert Malcolm Hamilton. If you only have to make up for your own missed contributions—and your employer will pay its part at no cost to you—it’s a no-brainer. “In many cases, the pension is heavily subsidized,” notes Hamilton, so you’re only paying a portion of the true cost.

Try to do it when you’re younger if you can, as the cost will be less. Buying back three years of service in your mid-30s may just set you back a few thousand dollars, but after age 50 the cost could increase 10-fold.

You can get a rough estimate of the benefit using an online pension buyback calculator, or have an actuary do the calculations for you. But either way, take the time to run the numbers. “Don’t just ignore it,” says Hamilton.

3 comments on “Never overlook a pension buyback

  1. Whoa, you missed a lot here! Very simply, always enter into an agreement to acquire that past service before April 30th of the year following your return to work, or pay for this service while you are on leave.

    For all DB registered pension plans if a person enters into an agreement to acquire past service after a period of reduced pay (i.e. maternity leave, sick leave, leave of absence) before April 30th of the year following the year the period of reduced pay ended (typically the end of maternal or parental leave, or a leave of absence, sick leave can be more complicated) the pension adjustments have to be redetermined retroactively, meaning you don’t have to ask permission to have the service. If it is later, then the the plan member would have to the acquisition of the service approved by a Certified PSPA. FYI, while on maternal/parental leave you typically are not earning income meaning you don’t accrue RRSP room, meaning it is less likely that you have have that PSPA Certified. Many plans default to have you recognise the service while you are on the leave paying for the service while on leave or when you return.

    For DC or MP plans you have to pay as you go, meaning you and your employer have to pay the pension contributions even though you are not working and earning any money,

    Group RRSPs, you are out of luck. If you have RRSP deduction limit you can contribute, otherwise there is no special provisions to allow you to contribute while on a leave of absence or a period of reduced pay,

    Reply

    • Another very important point is that the younger you are, the more chance of the DB pension plan increasing the age of pension eligibility. Someone that is 25 or 30 today should not expect a pension at 60 to 65 years old. It will likely be from 67 to 73 years old. This is a big deal that could cost $200,000, $300,000 or more in lost DB pension plan benefits being paid.

      Also, all pension plans can make changes that will likely cost the younger generation and their partners, spouses hundred of thousands of dollars over years. For example, a 60% versus 65% spouse monthly pension paid after a deceased spouse, higher future pension plan contributions from their paychecks etc.

      Reply

  2. It made really great sense to ‘buy back’ if you have a DB with COL indexing.

    Reply

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