# Buying back service



## betsu63 (Mar 4, 2011)

Just looking for some thoughts about pension buy back. I worked for the Ontario Government until 2000"when we were divested to a public hospital. We weren't allowed to transfer our money to our new pension at that time.It went through appeal and we are now able. Because I changed jobs and make more money now it will cost about $80000'to buy back 5 years of service. It will mean I get about $9000 a year more if I give my present plan this money. Any thoughts on whether it is worthwhile.???I don't have a financial planner and think my bank might be biased towards not doing it due to them "losing" the money. I have a spouse who would get 60% of what I would get at 65 if I die first.


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## nobleea (Oct 11, 2013)

betsu63 said:


> Just looking for some thoughts about pension buy back. I worked for the Ontario Government until 2000"when we were divested to a public hospital. We weren't allowed to transfer our money to our new pension at that time.It went through appeal and we are now able. Because I changed jobs and make more money now it will cost about $80000'to buy back 5 years of service. It will mean I get about $9000 a year more if I give my present plan this money. Any thoughts on whether it is worthwhile.???I don't have a financial planner and think my bank might be biased towards not doing it due to them "losing" the money. I have a spouse who would get 60% of what I would get at 65 if I die first.


I think it will all depend on how old you are and when you can start drawing you pension. If you're young, that's probably not a good investment. If you're older, it probably is. Depends on your life expectancy too, obviously.

We are wanting to buy back a year of my wife's service due to maternity leave last year. They still haven't gotten around to giving us the number, but I assume it's around $8K.


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## rikk (May 28, 2012)

Fwiw ... if you're buying back with taxed dollars (vs sheltered pension $$s), you'd I'd think get a tax refund for the buyback (payable later of course when collecting the pension) ... so the $80K might be more like $50K, depending on your tax rate ... I would think.


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## JB99 (Feb 20, 2015)

My wife and I work for the Federal Government and we both bought back our service 30 years ago

I am about to retire and boy am I ever glad I did.
First I am able to retire a year earlier than if I did not buy it back
Second I enjoy a full pension, my cost was $500 30 years ago and I will get way more back now.

And the service by back is tax deductible.

If you can take the 25 year loan, governments usually loan you the money at a fixed rate of 2% over the 25 years, pretty cheap money, and its life insured. The interest is not tax deductible!

Its a personal decision, but just for the fact I can retire early means allot, I know now that your are young it may not matter, but near the end of your career and your sick of the BS, you be glad you did.

On the negative side, remember $80K into an RRSP is yours forever, and what I mean you can invest it and the nest egg is yours, when you die it goes to your spouse, but here is the kicker if she dies the money passes on to the children. Your define pension plan Is probably 50% to your wife when you die, but it dies with her and nothing goes to the kids.

Think very carefully, for me it was the best choice I ever made, and all my friends all bought back their service as well. Its allot of money!

Good luck keep us posted on your decision


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## Sasquatch (Jan 28, 2012)

^^^ what he said !
I bought back 6 months of service at considerable cost since I decided to do it not that long before retiring.
I paid for it for about 3 years and then paid off the balance from my severance pay when I retired.
It enabled me to retire 6 months earlier with a full pension and I was a happy camper


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## OptsyEagle (Nov 29, 2009)

nobleea said:


> I think it will all depend on how old you are and when you can start drawing you pension.


We need to know how old you are now and when you can start drawing on that extra $9,000. If you are 25 and have to wait 40 more years, it is a bad idea. If you are 64 and 11 months and can draw on it next month, it is a slam dunk great offer.

Also, is the pension indexed and by how much. Is the $80,000 a transfer from a registered plan or is it from non-registered (after tax money). If from after tax money, will you get to deduct it on your taxes (most likely you will) and how much RRSP contribution room do you need to currently have to do this (there is no free lunch). You would be hit with a Past Service Pension Adjustment (PSPA) on your RRSP contribution room if using non-registered money, so be careful here.

Let us know.


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## betsu63 (Mar 4, 2011)

Hi, I am almost52 and can start a reduced pension at 55 regardless of what I do. I am transferring the money from the Ontario Government pension whether I buy back or not. If I don't work to 59 then I lose about 4500 on it anyway (5% a year for every year I am not 65) on the Ontario Government pension.The 80000 allows me to keep 5 years of service credit. I don't have to buy it all back and can use a combination of new money and transfer of RRSP. I would have close to $4000 of PSPA to think about and I didn't make a contribution to my RRSP for that reason just in case.. Because we pay a lot in our pensions I can't contribute much each year and have no extra contribution room.I know the smart thing to do is work past 55 but I feel that it will have to be in something else. 30 years of nursing will be enough by then as much as I enjoy my work. I have survivor pension plan and "widow" CPP income.


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## OldPro (Feb 25, 2015)

Suppose you buy it back and retire at 55. It will pay you $4500 a year you say. Now tell me what you can invest $80k in that will pay $4500 per year, every year without risk. That's a 5.6% return on investment. If you wait till age 65 and get $9k, that's 11.2% return minus whatever you could have earned on the $80K between now and then of course. But you could invest the $80k somewhere else and lose half of it by the time you are 65, who knows. I like the saying, 'a bird in the hand is worth 2 in the bush.'

The point is, this as 'sure' a thing as you can get but no matter what you do, it is all a gamble. There are no sure things when it comes to how to manage your money. 

My wife ended a career in the health industry at age 53 betsu. Did she get a reduced pension, of course she did. Does she regret that, absolutely not. You are looking at that 5% per year as a PENALTY for retiring earlier. Most people see it that way. Try this view. 

You worked for a day, you got paid for a day, you and your employer are even. Now you decide to stop working and your employer says, 'you know what, you were such a good employee we are going to continue to pay you X+$4500 a year for the rest of your life. What's more, if you die we will pay your spouse 60% of that for the rest of his/her life'. Imagine that, someone is going to pay you even though you aren't going to work. WHERE is the penalty in that?

Getting hung up on the 5% is common and people do it all the time with CPP as well. Let's use that as an example then since it appplies to everyone. But keep in mind that the same principle applies to taking ANY pension earlier at a reduced rate. I don't need to go through it all for you, others have already done that. Read here: http://retirehappy.ca/four-reasons-why-you-should-still-take-cpp-early-post-2011-rules/

You will see that first you are BETTING you will live past around age 75 to win $wise. If you die before that you lose. If you die before you even start claiming (people do die before age 65 after all) you lose it all. Mathematically, the argument is very strongly in favour of taking it early.

But even more importantly in my opinion (and in the opinion of the writer of the article linked) is when will you enjoy the money you get? There is no question that the younger you are when you get it, the better. People simply are able to enjoy the money the younger they are. What you will do if you retire at 55 is going to be different than if you retire at age 65 and how long you do it for will obviously be longer.

How do you put a $ value on a year of life? I retired at 43 and have enjoyed 25 years of retirement now. I turned 69 this month. Now suppose my neighbour is alos 69 but retired 4 years ago at 65. He has more CPP than I do, perhaps even a higher income overall than I do. But I have enough to live comfortably and do what I want to do with my time. I still travel for example. However, I have done that for 25 years compared to his 4 years. If we both drop dead tomorrow of a heart attack, who would you want to be, him or me? Whatever changes occur from today on, are as likely to affect him as they are me. His risk of health problems are as high (if not higher) than mine. His chance of going broke are the same as mine. etc. etc.


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## betsu63 (Mar 4, 2011)

Thanks everyone for your input. I still don't know what I am going to do but you have given me some ideas. Thanks


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## My Own Advisor (Sep 24, 2012)

betsu63 said:


> Hi, I am almost52 and can start a reduced pension at 55 regardless of what I do. I am transferring the money from the Ontario Government pension whether I buy back or not. If I don't work to 59 then I lose about 4500 on it anyway (5% a year for every year I am not 65) on the Ontario Government pension.The 80000 allows me to keep 5 years of service credit. I don't have to buy it all back and can use a combination of new money and transfer of RRSP. I would have close to $4000 of PSPA to think about and I didn't make a contribution to my RRSP for that reason just in case.. Because we pay a lot in our pensions I can't contribute much each year and have no extra contribution room.I know the smart thing to do is work past 55 but I feel that it will have to be in something else. 30 years of nursing will be enough by then as much as I enjoy my work. I have survivor pension plan and "widow" CPP income.


I would definitely buy back the pension. Having a secure income (pension) will give you options in life. Options in life are very, very good.

My parents were nurses, for 30 years each, they are now retired in their 60s. They are very grateful for their pensions. Without their pensions, based on their spending patterns, they might be broke. 

Although there are never any sure things in life, a government pension is about as close as it gets.

Good luck with your decision!


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## nobleea (Oct 11, 2013)

Hey folks,
similar question here. My wife has the option to buy back about 0.75 yrs of service stemming from her maternity/parental leave last year. The cost is $12,900. It would increase her pension income by $1,257. She is 34 and can collect full pension at 57. The pension is indexed at 70% of inflation. We would be paying it with a transfer from an existing RRSP, so no out of pocket costs.

It seems like it's pretty close to break even on a cost basis. Possibly even better for keeping it in the RRSP.

12900 growing at 6.5% a year until retirement, sheltered. then withdrawing an income of 1257 with growth after retirement being the same or more than inflation provides a comfortable cushion.
So then buying the service provides a couple of benefits: retire 0.75yrs earlier with no reduction in payment, and security of pension income.
She's a teacher.

I originally thought it would be a slam dunk to buy the service back, but after getting the buyout amount, maybe not. There is a good chance she will be retiring early. There's a penalty of 2% for every year retired early, so we might not get the full benefit of the buyback.

Thoughts?


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## OptsyEagle (Nov 29, 2009)

nobleea said:


> There's a penalty of 2% for every year retired early, so we might not get the full benefit of the buyback.
> 
> Thoughts?


That is not a penalty. That is the cost of the extra money they are giving your wife that she and the company, technically have not paid for. To not get the 2% "penalty" she will be forgoing 1 year of free money. So basically early retirement or regular retirement are basically the same; mathematically. It comes down to how she would like the benefit she has built up, paid out. That is all the so called "penalty" is.

Anyway, you might find that the $1,257 is also indexed between now and age 57 and that would probably sway things to the benefit of the pension. In any event, the guarantees of the income and the inflation index are probably something she would have a hard time finding in an RRSP type product, so I would lean towards the buy back, unless the math was OVERWELMINGLY against it... and it will most likely not be.


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## nobleea (Oct 11, 2013)

OptsyEagle said:


> Anyway, you might find that the $1,257 is also indexed between now and age 57 and that would probably sway things to the benefit of the pension. In any event, the guarantees of the income and the inflation index are probably something she would have a hard time finding in an RRSP type product, so I would lean towards the buy back, unless the math was OVERWELMINGLY against it... and it will most likely not be.


I don't know if it's indexed between now and then. I suspect not. They explain it as if she was to stop working for them now, and take pension at 57, she would get 1257 in annual income (by paying the 13K now).


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## RBull (Jan 20, 2013)

Double check the "penalty" for retiring early re considering your decision above. I suspect it may be more depending on what age you may be talking about. 

In our province for early retirement earliest retirement with pension is factor of 80 - (age=50 minimum + years of service=30 minimum). In this case the pension shall be reduced by 5% (pro rated) for each year you either are less than age 55 or have less than 35 years of service, whichever is the lesser. My wife went at age 53 -a factor of 83 = penalty of 6.65% beyond the reduction of years of service x 2%. 

Pension = 30 years of service x 2% = 60% - 6.65% = 53.5%


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## nobleea (Oct 11, 2013)

RBull said:


> Double check the "penalty" for retiring early re considering your decision above. I suspect it may be more depending on what age you may be talking about.
> 
> In our province for early retirement earliest retirement with pension is factor of 80 - (age=50 minimum + years of service=30 minimum). In this case the pension shall be reduced by 5% (pro rated) for each year you either are less than age 55 or have less than 35 years of service, whichever is the lesser. My wife went at age 53 -a factor of 83 = penalty of 6.65% beyond the reduction of years of service x 2%.
> 
> Pension = 30 years of service x 2% = 60% - 6.65% = 53.5%


It's the same calculation, except the factor is 85 (age at retirement plus yrs of service) and the reduction is 2% per year instead of 5% (every year under 65 or under 85 factor, whichever is less)
it's 70% of income of the highest 5 consecutive income years, when combined with CPP


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## RBull (Jan 20, 2013)

nobleea said:


> It's the same calculation, except the factor is 85 (age at retirement plus yrs of service) and the reduction is 2% per year instead of 5% (every year under 65 or under 85 factor, whichever is less)
> it's 70% of income of the highest 5 consecutive income years, when combined with CPP


Double check. I believe you will find differently. 

You may be confusing reduction with penalty. Here both are involved if retiring below full retirement factor of 85 or at least age 55.


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## nobleea (Oct 11, 2013)

RBull said:


> Double check. I believe you will find differently.
> 
> You may be confusing reduction with penalty. Here both are involved if retiring below full retirement factor of 85 or at least age 55.


Here is the link
http://www.teachers.ab.ca/SiteColle...t/Check It Out Brochure (English) TW-32-3.pdf
I assume it's 2% reduction for retiring below factor 85 and 2% additional for not having the extra year (2%x35yrs service).


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## RBull (Jan 20, 2013)

Fair enough. The difference as I read it is a teacher cannot collect a pension until age 55, so that explains the no penalty clause- only a reduction. My wife started hers at 53 with the penalty & reduction. The other payout terms are the same-2% with bridging until 65. 

For the calculation it seems to be a simple calculation of years of service plus age at retirement @ 2%. So her DOB and retirement date will dictate the percentage reduction from 70% (85 factor), unless there is also some pro rating for part year etc, like is done here. 

So back to the original question. Go with the pension buyback along with indexing unless it is obviously far less attractive, and check out if the $1257 is also indexed- (probably).

Having my wife's pension as an income base is very comforting and we can draw income from investments to live a nice lifestyle in retirement. An interesting stat in that link: A retiree would have to save the same amount and earn 11% before and after retirement to equal the benefit.


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## beeKeeper (Mar 13, 2016)

You'll want to check the tax implications of your planned buy back..
While not pertinent to your specific scenario, you can find some guidance on the tax implications of buying back Government of Canada public service at the following web site:
tpsgc-pwgsc.gc.ca/remuneration-compensation/services-pension-services/pension/info/tirs-sbp-eng.html#a5


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## bowriverguy (Mar 13, 2016)

*Buy back*

Hello all,

First post for me! I really enjoy this forum.
I retired as a teacher-administrator in Calgary last June 30th. I had taken a sabbatical year 7 years prior to retiring and it would have cost me $30 000 to buy back that year for pension purposes!! So I decided to work one more year instead!


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