# Should we buy back pension?



## digitalatlas (Jun 6, 2015)

Hi,

My wife's a teacher and she took a few years off to raise our baby a few years ago. Now there's a pension balance of about $14,000, which in 15 years (earliest unreduced pension), will confer a benefit of just under $2000 per year. People generally suggest buying back, but I just did some quick estimates and I don't know. There's definitely the security in the pension, but check this out:

$14,000 invested with a 5% return over the next 15 years is $28,600. If I start drawing down $2000 per year from that point, allowing the remainder to grow, the money will run out after another 25 years, my wife will be 79. 

Now this comes down to, can I get a 5% return on average over the next 40 years and will she live past 79. Obviously no one really knows the answer to these questions. I hope we live a long time, but the figures are giving me some pause as to whether this buyback is worthwhile. We would be transferring from RRSP, so no additional tax deduction. Interest rates are low now so it's more expensive. We have other investments planned for retirement too. What would you do?

Thanks.


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## OptsyEagle (Nov 29, 2009)

If it is an indexed pension, which I believe teachers would probably have, the buyback is a no-brainer. Do it.


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## birdman (Feb 12, 2013)

Although the amount is not large I would do it as the risk would be with the Pension Plan as opposed to yourself.


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## Longtimeago (Aug 8, 2018)

https://www.moneysense.ca/save/retirement/pensions/pension-buyback/


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## ian (Jun 18, 2016)

Is this a one time only offer or can you take the buy back option at a later date? I would be inclined to snap this up.


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## fireseeker (Jul 24, 2017)

At its heart, I don't think this is a math question.
The choice you face is whether you want to shift some investment risk and longevity risk to the pension plan.
Managing the funds yourself means taking on more risk. So, you should expect to exceed the imputed return offered by the pension plan, if you elect to keep the funds in your hands.
Speaking of longevity risk, barring some unstated risk or health factor, your wife is likely to live much longer than 79.


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## sags (May 15, 2010)

My wife faced a similar decision and at the end of the day it boiled down to how long my wife was out of the pension plan before wanting to buy back past service time.

Since 15 years had passed it was prohibitively expensive to purchase each year of pension. The sooner the better when buying back pension time.

On the other hand, my wife retired and started working part time for something to do. We figured she would only work a few days here and there and not for long.

She decided not to contribute to the CPP and here it is 15 years later and she earns $35,000 a year part time. She should have contributed.....LOL.

We never feel like we made a mistake contributing to our pensions when the money goes into our bank account each month.

You just never know what the future holds and I would be inclined to buy back the pension time if it is at a reasonable cost.


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## Plugging Along (Jan 3, 2011)

Without the details of the pension, generally, its a good idea to do the buy back, and earlier is better as its based on your current earnings.

I had my advisor run the numbers of if buying back was worth it or not, and even though he would have made money from me to not put it in my pension (we would have invested with him). He said there was no question that the buy back was worth it.

If it's a secure pension, you can treat the pension equivalent to fixed income in your over all portfolio, allowing for higher risks in your own managed portfolio. The other consideration which I feel it much more important and under stated is the time. $2000 more a year for life doesn't sound like that much more for some. HOWEVER, buying back the pension allows you to retire that amount of time EARLIER with the same pension amount. So think about 59 instead of 60 (or whatever the planned retirement without an early penality). Is that worth the $14K. I am finding as I work more, that year means more and more.


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## digitalatlas (Jun 6, 2015)

Thanks for your thoughts, everyone.

Among all the helpful perspectives, I think the way fireseeker framed it helps keep it in context of our overall retirement plans (even though this many years away). I think shifting some investment risk to a supposedly safer vehicle is I guess what's happening. I mean, we have equity investments and real estate, and we're bearing all the risk for all those ourselves. 

I was just caught up in how it seemed like age 79 was quite a long time to break even. I mean, lots of assumptions here, key among them a 5% real return (the pension is indexed to inflation). I mean, I guess I could do better, but could also do worse. Even if that's a reasonable rate to assume, I would have to ride the waves and manage ups and downs myself, whereas the pension would be less volatile. I'm in my mid 30s now, but maybe when we're over 70, we don't want to deal with that madness, lol.


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## OptsyEagle (Nov 29, 2009)

In a perfect world it would break even on the day your wife died. I imagine they expect her to live longer then age 79, so I am not sure what the surprise is.

Did you incorporate indexing in the numbers you listed in the first post. That is why I mentioned it. If not, I would think the break even point would happen even sooner (the date where the pension becomes better).


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## digitalatlas (Jun 6, 2015)

Yah, I just quick and dirty assumed a 7% return with 2% inflation. It may even be a little optimistic, seeing how the world's going, but who knows. But that actually gives more support for putting it into the pension...


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## OptsyEagle (Nov 29, 2009)

digitalatlas said:


> Yah, I just quick and dirty assumed a 7% return with 2% inflation. It may even be a little optimistic, seeing how the world's going, but who knows. But that actually gives more support for putting it into the pension...


I am not sure I am following. The 5% you used in the first post was on the capital of $14,000, if I read it correctly. The indexation would be on the $2,000 per year. In other words, could $14,000 invested today payout $2,000 per year increasing at the rate of inflation each year, for the life of your wife? Even if the $2,000 does not start today, I would imagine its indexation does.

Also, you really can't compare a guaranteed pension to a non-guaranteed investment that could make 7%. I would think one should think of their pension money a lot like fixed income and I don't know many FI portfolios returning 7%. You would be lucky to make 3%. Even if you think you could get 7%, there is a big risk that you will not. The pension carries none of those risks.


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## digitalatlas (Jun 6, 2015)

You're right!

I read the pension description again and while it's not very explicit, it says that if we complete the buyback, the pension will have increased your future pension by $2000. Now, I would like to think that this is $2000 in today's dollars, and they will pay whatever that will be in 15 years. If that's the case, ya it seems better and simpler to go with the buyback.

I guess even if I assumed 5% gain on the 14k, the annual withdrawal at that point would not be $2000, it'd like $2700, and break even would be 15 years..(really rough estimates) my wife would be 69...much more worthwhile than in my original post.

If the pension statement says $2000 and it means that will be the amount in 15 years...yah, that's not great because inflation will have eaten away at it of 15 years. But I can't imagine this is the case. There's a general statement about the pension that it is indexed to inflation (elsewhere, not repeated on this statement), so should be safe. There is one caveat, that they said that for contributions after a certain year a few years ago, they would be indexed to 0-100% of inflation, depending on how the pension performs. In theory could be 0.

Anyway, probably overthinking it at this point. I've already started looking into transferring RRSP to do the buyback. Thanks!


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## nobleea (Oct 11, 2013)

Here's an interesting question.
My wife will have the opportunity to buy back her pension from various mat leaves. I would expect this would be somewhere between 25-30K.
We can buy it direct by writing a cheque to the pension company. The more common method is to transfer from an existing RRSP. She has a small RRSP, but not enough to cover it.

Question: Can I open a spousal RRSP for her, contribute the required amount, and then she use that to transfer over to her pension? We both have enough RRSP contribution room. And my income will always be higher than hers, particularly this year when she will be working part time. This seems like a far better option financially if we are committed to buy back the pension, but I'm not sure if a spousal RRSP can be used to transfer for a pension buy back.


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## Eclectic12 (Oct 20, 2010)

It looks like it as this detailed RBC document says:



> It is possible to use funds that are held in a spousal RRSP without triggering the attribution rules as long as the pension plan member and annuitant of the RRSP are the same person and the payment is made by a direct tax sheltered transfer to the pension plan.


https://ca.rbcwealthmanagement.com/delegate/services/file/634149/content


Cheers


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