# Should I purchase retirement service credit?



## dutchie (Dec 10, 2013)

Hi First post here  I just recently found out about this forum and all of the great info and dialog that goes on here. I would like to get some input on a pension dilemma we have.

My wife has just started collecting her pension and has been offered the opportunity of purchasing 5.33 years of past service from 1981 to 1986. The total cost would be $47608.00 and would bump up her pension from $1397 per month to $1642 per month. She is 52 years old. We can buy as little or as much as we want at a cost of $8926 per year adding $46 per month to her pension.

I can't decide whether we should go ahead or not. Right now the money we would use to purchase, is in a conservative RRSP with Great West Life, averaging 6% since 2001. 
By my calculations that money would last over 40 years with the same payout if I left it where it is and continued to average 6% over those 40 years.
The chance of course is that it could do worse over the next 40 years but by the same token it could also do better. 

If I make the purchase the money is out of my control but I have a guaranteed $245 income stream through good times or bad.

Not sure if there is anything I should be considering but haven't thought of. That's where I'm hoping you Folks can help me out.

Have I considered this properly? Is there anything I'm missing?

Thanks so much


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## wendi1 (Oct 2, 2013)

If she dies (sorry), do you get a survivorship benefit? For instance, if she is hit by a bus tomorrow, does her pension stop, or do you only get 50% of it?

I think your assumption that you will get 6% from now on in your conservative RRSP is a bit optimistic, too.


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## dutchie (Dec 10, 2013)

yes 100% survivorship benefit.





wendi1 said:


> If she dies (sorry), do you get a survivorship benefit? For instance, if she is hit by a bus tomorrow, does her pension stop, or do you only get 50% of it?
> 
> I think your assumption that you will get 6% from now on in your conservative RRSP is a bit optimistic, too.


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## atrp2biz (Sep 22, 2010)

Curious-Is the $47k before or after tax (ie. is there a decrease in taxable income in the contribution).


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## dutchie (Dec 10, 2013)

I don't think so. The letter from the pension plan only states "Payment may be made by cheque or funds transferred directly from your RRSP." So I take that to mean no decrease in taxable income but perhaps I'm wrong. I will doublecheck with the pension plan people.




atrp2biz said:


> Curious-Is the $47k before or after tax (ie. is there a decrease in taxable income in the contribution).


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## birdman (Feb 12, 2013)

It would also be of interest to know if it is indexed. In any event, a small portion of my retirement is funded by a defined benefit plan and the rest I look after myself. One thing which is very nice with the defined benefit plan is that the investment risk and decisions are made by someone else and you don't have to worry about it. You simply collect your monthly cheque similaf to CPP. While I didn't try to come to a conclusion on the math, I expect that from an actuary perspective it would be indifferent. I would consider doing it providing you have other investments to rely on during retirement which could provide some protection against the unforseen such as rapidly rising interest rates and inflation.


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## dutchie (Dec 10, 2013)

The plan has a small recently incorporated discretionary COLA which is being provided starting 2016 I believe. We have $300,000 in a RRSP with Great West Life averaging just over 6% since 2001 plus we own our $300,000 dollar home. We are debt free and my pension will not kick in until I am 65 (10 more years) I am working right now but would love to retire right now and am seriously considering doing so.

Thanks everyone!


QUOTE=frase;210327]It would also be of interest to know if it is indexed. In any event, a small portion of my retirement is funded by a defined benefit plan and the rest I look after myself. One thing which is very nice with the defined benefit plan is that the investment risk and decisions are made by someone else and you don't have to worry about it. You simply collect your monthly cheque similaf to CPP. While I didn't try to come to a conclusion on the math, I expect that from an actuary perspective it would be indifferent. I would consider doing it providing you have other investments to rely on during retirement which could provide some protection against the unforseen such as rapidly rising interest rates and inflation.[/QUOTE]


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## MoneyGal (Apr 24, 2009)

frase said:


> It would also be of interest to know if it is indexed. In any event, a small portion of my retirement is funded by a defined benefit plan and the rest I look after myself. One thing which is very nice with the defined benefit plan is that the investment risk and decisions are made by someone else and you don't have to worry about it. You simply collect your monthly cheque similaf to CPP. *While I didn't try to come to a conclusion on the math, I expect that from an actuary perspective it would be indifferent. * I would consider doing it providing you have other investments to rely on during retirement which could provide some protection against the unforseen such as rapidly rising interest rates and inflation.


It will be actuarially fair *however* it is important to note that the actuarial calculations are based on pooling risk across a large group of people (the other members of the plan). 

Whether any one individual will come out "ahead" or not in either scenario depends principally (if they choose to remain in the plan/buy additional service) on their personal longevity, or (if they choose to invest in financial markets instead) on market returns + inflation. 

Because we don't know those factors in advance, the decision will be made on your individual appreciation of/assessment of the different kinds of risks to which you are exposed in either scenario, and your tolerance for being exposed to those risks.


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## wendi1 (Oct 2, 2013)

I agree with Moneygal - this is a coin flip, unless you have some personal longevity/health info that we do not. My personal prejudice is in favor of the purchase.

The reasoning: you still have substantial assets for lump sum purchases if you need them, your GWL returns are NOT guaranteed in the future, and delightful as obsessing over finances is, as a hobby, it is even better to let someone do it, and just cash the cheques.

Let us know which way the two of you decide to go.


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## dutchie (Dec 10, 2013)

I have a phone call in with the pension plan and an accountant concerning the before or after tax question. While I have been waiting, I was rereading the original application and it states "By purchasing this service, it may affect your RRSP contribution room. For information on any tax implications please contact a tax advisor ........"
So does that answer the question? I'm getting a little confused but I am taking it to mean, that if I transfer money from an existing RRSP no change to my taxable income. If I use non RRSP money that will decrease my taxable income as long as I have enough room in my RRSP contribution limit. Am I correct?



atrp2biz said:


> Curious-Is the $47k before or after tax (ie. is there a decrease in taxable income in the contribution).


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## MoneyGal (Apr 24, 2009)

Not quite. The purchase of past service in a pension plan affects your RRSP contribution room because these contributions have a different impact on your taxable income than an RRSP contribution does. 

RRSP contribution room is decreased dollar for dollar by contributions (up to the specified maximum); DB pension contributions do not have a dollar-for-dollar impact but are subject to a different calculation. (Specifically, nine times the benefit accrued during the year less $600.)

What will happen if you purchase the past service is that your available RRSP contribution room will be subject to what is called a pension adjustment. You will always accrue up to $600 of RRSP room in every year, however. 

If you have questions about how this will impact you specifically, you should speak with a tax advisor.


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## dutchie (Dec 10, 2013)

Hi Everyone
Still waiting for my tax expert/accountant to get back to me. :upset: 
I was reading "the Pension Puzzle " by Bruce Cohen and he has a small section in the book about service buy-backs.
Apparently pre 1990 service is tax deductible (though not necessarily all in one year) and DOES NOT affect my RRSP contribution room. So I am definitely better off using unsheltered money in order to get those extra tax deductions. 
So once my accountant calls me back and she gives me the A-OK I think we will definitely be doing this.

Thanks everyone for your input and help. Very much appreciated!!!


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