Increase Your Pension by Buying Back Periods of Service
If you contribute to a supplemental pension plan (SPP) and certain work periods do not count toward your pension, you may be able to correct the situation to increase your pension income or retire earlier while minimizing or eliminating any reduction to your pension benefits.
Who Can Buy Back Periods of Service?
Buying back periods of service is only possible in defined benefit pension plans, the most common type of employee SPP. You have to still be employed (full or part time) at the company where you want to buy back periods of work. In other words, you cannot use this option if you've left your job or are already retired.
What Periods of Service Can You Buy Back?
- Periods during which you did not receive a salary, such as maternity or paternity leave, a sabbatical, or study leave
- Periods not credited to you during transfer to a new SPP
- Periods during which you were unable to contribute to your SPP, notably as a result of your age, number of years of service, or employee status
- Probationary periods
- Strike or layoff periods
- Periods when you paid into your SPP, but your contributions were reimbursed
Remember that these circumstances do not automatically qualify you to buy back time. Check your SPP to find out what periods are eligible.
Is It Worth Your While?
A number of factors will determine whether or not it is worthwhile to buy back periods of service. The following are of particular importance:
- The cost and the terms of payment
- The number of periods you want to buy back and how much it will add to your pension
- The years involved. Different tax rules apply to periods before 1990 and after 1989. Since buying back periods of service can reduce your maximum contribution to registered retirement savings plans (RRSPs) in the year you make the purchase, it's important to get advice to determine how each option will affect you.
Before buying back periods of service, consider the following:
- The rate your salary will increase in upcoming years
- The regular age of retirement under your SPP
- Any actuarial adjustment upon retirement
- The indexing rate set out in your SPP
- Yields from your RRSPs
- The cost of purchasing an annuity
- Changes in the interest rate, inflation, etc.
If buying back periods of service is advantageous, you could...
- Increase your SPP pension
- Avoid any tax impact by financing the buyback through your RRSP
- Deduct the amount you spend, as long as it doesn't come from your RRSP
- In some cases, suffer less of the actuarial reduction that will affect your right to a full pension
- Benefit from possible improvements to your defined benefit pension plan through the pension credit your buyback qualifies you for
- Enable your spouse or heirs to qualify for a higher survivor's pension in the event of your death
Make the Right Decision. Talk to Those Who Know!
- Your SPP administrator
- A financial planner
- A tax expert
Buying back periods of service can affect your own financial situation and your family's. For instance, it may be best to have your employer subsidize the buyback of past service, in full or in part. In some circumstances, the cost of buying back periods of service will determine whether or not it is worth your while.
Certain unregistered amounts used to buy back periods of service might be part of the family patrimony. Make sure you find out beforehand.