# Pension Adjustment



## Whiteout (Aug 23, 2010)

So I've been thinking a little bit about working towards topping up my RRSPs lately and this led me to looking into the pension adjustment for fear of over contributions some day. I have been researching and can't really get a clear answer as to how exactly it is calculated. I can find the formula but what eludes me is how exactly to get the number in which you multiply by 9. What also makes me wonder is that I have read quite a few things which say that it is yours and your employers contributions which are used in the PA, but if that is the case then I will be losing RRSP contribution room with my pension alone as contribution amounts are 11.7% up to YMPE and 16.72% over YMPE. Putting me way over RRSP deduction limit 18% when you factor in empoyer matched.

So I'm confused at what my employer has for lines 20 and 52 on the T4 (from 2012). Line 20 is $7691.04 and PA is $9189. Is this incorrect or does the forumla not actually count what the employer contributed? My concern is that if I top up my RRSP in the next few years and then leave the current employer, then the amount I receive is more than those PAs from other years add up to and when PAR kicks in, will I have a huge issue on my hands with over contribution? I'm quite confused by this and hopefully this is clear, it has just made me a little fearful of topping up my RRSPs...


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## wendi1 (Oct 2, 2013)

Well, I am confused, now. 

Your PA on this year's T4 affects NEXT year's contribution RRSP limit. Your THIS year's contribution limit is already calculated, and was printed on your Notice of Assessment that you got last year. If you can't find it, contact CRA.

You are allowed a lifetime overcontribution of $2000, without penalty. Does this help?


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## Eclectic12 (Oct 20, 2010)

+1 ... the PA is going to reduce your RRSP contribution room granted for 2013. Once the 2013 tax return is filed, whatever RRSP room was granted for 2013 plus any unused room (as well as any contributed but not yet deducted amounts) will be on your 2013 NOA.

While it's good to learn about the PA as well as keep your own track to verify that no mistakes have happened - it's easier to look at your 2012 NOA in the "Your 2012 RRSP Deduction Limit", part A will show how much contribution room was available, after filing your 2012 tax return. You will then only have to subtract any RRSP contributions made in 2013. 

This will tell you what is available, with $600 or more being added for 2013.

Maybe this link will help ... though it will be easier if you confirm what type of pension you have ....
http://blog.taxresource.ca/calculating-the-pension-adjustment/




Whiteout said:


> ... My concern is that if I top up my RRSP in the next few years and then leave the current employer, then the amount I receive is more than those PAs from other years add up to and when PAR kicks in, will I have a huge issue on my hands with over contribution? ...


Huh?

First off - the PA only affects the calculation of the RRSP contribution room in the current tax year that is made available on Jan 1 of the following year. So it does not cross tax years (i.e. 2012's PA affects the 2012 calculation of RRSP contribution room to be added in 2013, 2013's will affect the 2013 calculation ...).

CRA's link (see the link for chart 3 if you want to walk through the full calculation):
http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/rrsp-reer/cntrbtng/lmts-eng.html


Secondly - if you leave your employer ... the last PA for that company is going to reduce the RRSP room earned in that tax year. That's the end of that PA's effect. (If the new company has a pension, you could have two PA's, one for the last bit at the first company and one for the new company's pension.)

If you also quit the pension, the PAR will be calculated and *increase* your RRSP contribution room.



> PAR is used to restore an individual's RRSP room when a member terminates their membership in a benefit provision of a registered pension plan or deferred profit sharing plan (DPSP).


http://www.cra-arc.gc.ca/tx/rgstrd/papspapar-fefespfer/par-fer/menu-eng.html


For example, when I left a company years ago and quit the db pension ... I had about $9K of unused RRSP contribution room, after the tax return was filed including the PA, I had about $3K of RRSP contribution room added for that tax year ($9K + $3K = $12K). When the gov't finally calculated the PAR - it added $10K of contribution room back so that I ended up with $12K + $10K = $22K of RRSP contribution room available.


Bottom line is the main way of having an over-contribution is to not be aware of what's currently available and/or contribute based on an inaccurate estimate before the NOA confirms the calculated number.



Cheers


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## Whiteout (Aug 23, 2010)

I see I should have phrased my concerns differently. Wendi, I understand about the 2012 T4 already being calculated into the notice of assessment that I received in 2013, I only used 2012 as an example as I don't have this year's T4 yet. My concern was whether or not the PA was calculated properly. Thank you for trying though as I get how confusing and hidden the actual question is. Hopefully the fact that you and Eclectic mostly missed what I was asking, is proof that the question is out to lunch and a non-issue.

Overall I maybe should have just stuck with something more like this: I read that the pension adjustment was based on factors of what you and your employer contributed to the plan. In 2012 (only using this as it is the last T4 I had) I contributed $7691.04 and my employer contributed $7691.04 totally over $15000 but the number in the PA box was only $9189 (This is the number CRA has to go on to make my max RRSP amount for 2013). My fear is that there is a mistake in the PA and that the number should be much higher. When I run a calculation on my pension website for if I were to leave my job right now, the amount is much larger than all of my pension adjustments over the years added together. This is where I had concerns with the PAR and was unsure if it worked in reverse if my PAs were not calculated properly. I was worried that the amount I received above that of the PAs, would be an over contribution if I had maxed out my RRSP and had no more room left.

The link did help Eclectic, "For 1997 and later: [(9 x benefit entitlement) - $600]". The "benefit entitlement" is the part I was referring to in my original post. I referred to it as the number you multiply by 9 as I forgot the term that went with it. I was trying to make sure that the "benefit entitlement" wasn't calculated by adding both mine and the employers contributions together. I think this section answers my question though "The actual contributions to a defined benefit pension plan are not directly reflected in the PA. Rather the PA reflects the current value of the future benefit entitlement". (So therefore I don't need to be afraid that my PA should be over $15k).

That was also part of my original question I guess was that if my contribution was 11% (or higher) of my pay, and the employers contribution was 11%, totaling 22% plus, then I would be losing RRSP deduction room (of 4% or more) when the limit only goes up by 18% of my income. But since the "benefit entitlement" is not calculated that way, I should have nothing to fear if I top up my RRSPs and then decide someday to leave the plan.

So, my plan is to max out my TFSA and then to max out my RRSP and not worry about an inaccurate PA and all should be good


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## PoolAndRapid (Dec 3, 2013)

..


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## Zeeshanbmerchant (Jan 4, 2014)

11% employer pension contribution 

You must be a very valued employee. Thank you for the defined benefit pension adjustment lesson


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## Eclectic12 (Oct 20, 2010)

Whiteout said:


> ... My concern was whether or not the PA was calculated properly. Thank you for trying though as I get how confusing and hidden the actual question is. Hopefully the fact that you and Eclectic mostly missed what I was asking, is proof that the question is out to lunch and a non-issue...


That part was lost in all the talk of RRSP over-contribution and looking at making more contributions.




Whiteout said:


> ... My fear is that there is a mistake in the PA and that the number should be much higher ...
> I think this section answers my question though "The actual contributions to a defined benefit pension plan are not directly reflected in the PA. Rather the PA reflects the current value of the future benefit entitlement" ...


If you can confirm that you are in a defined benefit (DB) pension - then yes, the PA calculation use the earned benefit and ignored the contributions. This is because with a guaranteed benefit - the employer might have to put in a lot more more to have the db pension in a position to payout.

So to keep it relatively fair for those in defined contribution (DC) or some form of RRSP - the reduction in RRSP contribution room has to be based on what will be paid out in the future. For these other types, the contributions play a direct part as there is no way to know what will be available in the future to be withdrawn.




Whiteout said:


> ... But since the "benefit entitlement" is not calculated that way, I should have nothing to fear if I top up my RRSPs and then decide someday to leave the plan.
> 
> So, my plan is to max out my TFSA and then to max out my RRSP and not worry about an inaccurate PA and all should be good


This should be fine. If you really want to - you should be able to calculate it & asks questions if it doesn't look right.

Another link with more info:
http://www.advisor.ca/retirement/area-52-know-your-pension-adjustments-45085


Cheers


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## Whiteout (Aug 23, 2010)

PoolAndRapid, Yes Alberta PSPP and you are quite close to the pensionable income from 2012. The pensionable income is only base salary? If so, then it was a little lower than your estimate.

Zeeshanbmerchant, I'm no more valued than any other, it is the same as everyone else. Contributions have more than doubled in the last few years with no additional benefits from when we were paying less than half that amount. I think Eclectic answers it here "This is because with a guaranteed benefit - the employer might have to put in a lot more more to have the db pension in a position to payout."

Eclectic, first off please teach me the ways of adding the quotes linked to the other person's post as I like that format for replying  To answer your first one, I'm not surprised as I tend to add too much of the wrong detail when posting and not enough of the right detail. I will continue to work on being more concise. Second part, yes it is DB and sorry I didn't confirm in my last post. And the thrid part, I am much less concerned now and thank you for all of the help. It was the possible misinterpretation of what I read somewhere that had me worry, but your confirmation from the last few replies on how the pension adjustment from defined benefit plans works has made me feel much less uneasy. Thanks again.


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## PoolAndRapid (Dec 3, 2013)

..


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## Whiteout (Aug 23, 2010)

Thanks again Pool, very good information which I will use for sure.


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## Eclectic12 (Oct 20, 2010)

Whiteout said:


> ... Eclectic, first off please teach me the ways of adding the quotes linked to the other person's post as I like that format for replying  ....


It's a "Reply With Quote", with some edits.

For each quote to give context to my response, it's just a matter of making sure the opening block starts with the user quote [] section, then whatever the line is and ends with the [/ ] block. Whatever I think is extra get's deleted and then my text goes after. Repeat for the next snippet. 

As a final check, "GoAdvanced" and use the "Preview Post" to check for missing or incorrectly bracketed sections (in addition to errors, misspelling etc.), layout and other such stuff.




Whiteout said:


> Eclectic12 said:
> 
> 
> > That part was lost in all the talk of RRSP over-contribution and looking at making more contributions ...
> ...


For fancier double quotes like the above, I select multiple messages by checking multi-quote icon and then "Reply to Thread". The reply then has multiple reply's for similar formatting.


Returning to the thread, as for misinterpretation of something read - it's not the easiest to figure out, never mind that where there's a person, there's the possibility of errors.


Cheers


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## Zeeshanbmerchant (Jan 4, 2014)

Whiteout said:


> PoolAndRapid, Yes Alberta PSPP and you are quite close to the pensionable income from 2012. The pensionable income is only base salary? If so, then it was a little lower than your estimate.
> 
> Zeeshanbmerchant, I'm no more valued than any other, it is the same as everyone else. Contributions have more than doubled in the last few years with no additional benefits from when we were paying less than half that amount. I think Eclectic answers it here "This is because with a guaranteed benefit - the employer might have to put in a lot more more to have the db pension in a position to payout."
> 
> Eclectic, first off please teach me the ways of adding the quotes linked to the other person's post as I like that format for replying  To answer your first one, I'm not surprised as I tend to add too much of the wrong detail when posting and not enough of the right detail. I will continue to work on being more concise. Second part, yes it is DB and sorry I didn't confirm in my last post. And the thrid part, I am much less concerned now and thank you for all of the help. It was the possible misinterpretation of what I read somewhere that had me worry, but your confirmation from the last few replies on how the pension adjustment from defined benefit plans works has made me feel much less uneasy. Thanks again.


you are valued enough to get a defined benefit plan, a dream in today's workplace. I have only had defined contribution.


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## the-royal-mail (Dec 11, 2009)

Zeeshanbmerchant, it is not necessary to quote as you did above. That could have easily been replied to by addressing the poster by name. We've already read what was written.


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## joncnca (Jul 12, 2009)

correct me if i'm wrong, but it seems to me that the OP's concern is:

you get about 18% of income to contribute each year. his pension (self + employer contributions) is at or over 18% of his income. therefore, if he makes any additional RRSP contributions, he'll be over the 18% (assuming he has not carried over anything significant from previous years), and obviously he doesn't want to be over ($2000 lifetime over contribution allowance notwithstanding)

hence, he wants to know if the employer portion of pension contributions is actually included in the allowed 18%.

this is my first year with a DB pension too, so i'll be looking into this myself. however, my self+employer contributions will not be as much as 18% of my income, so i don't really have the same problem. i'm not familiar with his province, but i'm surprised that there are pensions that contribute (self+employer) up to 18% of one's income, seems very high. hopefully that pays off in retirement =)


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## Eclectic12 (Oct 20, 2010)

joncnca said:


> correct me if i'm wrong, but it seems to me that the OP's concern is:
> 
> you get about 18% of income to contribute each year.


Actually, this is simple case where one's *earned* income is the same as what's on one's T4, there is no PA, PAR or PSAP and is capped at $23,820 for tax year 2013.

I have put "earned" in bold text because if you follow the link I posted up thread that talks about "chart 3" for the full calculation, you will discover that "earned" income adds some income (ex. employment income, net income from a business, disability payments from CPP/QPP) and subtracts others (ex. royalties from invention/work authored, annual union/professional dues, unemployment benefit plan payments, employment expenses). 

So looking only at the income box on one's T4 is only part of the story.

Further down in the chart, the earned income x 18% is set to the lessor of this number or the 2013 cap of $23,820 (step 3).

The next step is to subtract the PA (step 4).

Then the PAR is added as step 5, the PSPS is dealt with in step 6 and finally, the 2013 RRSP contribution limit in step 7 (which adds both the unused previous year room plus the 2013 final RRSP contribution room earned).




joncnca said:


> ... his pension (self + employer contributions) is at or over 18% of his income. therefore, if he makes any additional RRSP contributions, he'll be over the 18% (assuming he has not carried over anything significant from previous years), ...


Again ... RRSP contributions are against the RRSP contribution limit that you've already earned. 

The db pension contributions result in a PA, which reduces that 18% of earned income number for current year RRSP contribution limit calculation. 

So unless the OP runs the numbers and finds out that the company pension administrator, the IT staff producing the T4 as well as the actuaries reviewing the plan have incorrectly calculated/reported the PA - the thing to check is whether the RRSP top up contributions exceeds what was on the 2012 NOA, as available minus any 2013 RRSP contributions made after receiving the NOA.

[ I suspect the most likely way to find an inaccurate PA is to run through calculations, including the RRSP contribution limit earned that tax year.]


Secondly - the db pension guarantees a payout during retirement. As per the link upthread:


> The actual contributions to a defined benefit pension plan are not directly reflected in the PA. Rather the PA reflects the current value of the future benefit entitlement.
> 
> Stated a little differently, the PA reflect what you would put into an RRSP to get the same benefit in the future assuming you get the same rate of return as the pension.


The key is what will be paid out - not the percentages or contributions going into the db pension plan.

The employer could easily end up putting in more to take care of a shortfall (i.e. 18% combined employee/employer might not be enough if the investments don't perform as expected). The employer contributions are fluctuating so that the reduction of RRSP contribution room via the PA can't be tied to the amount of the contributions.





joncnca said:


> ... hence, he wants to know if the employer portion of pension contributions is actually included in the allowed 18%.


And the answer is that the employer contributions are not reducing the current tax year contribution room earned on a $ for $ basis but are included indirectly though the earned benefit formula for the PA.

So the OP will have to monitor their RRSP contribution limit as well as their contributions made but that should be it. I've known people whose db pension paid out enough that each year they were only earning $600 of additional room. That really slows down one's possible contributions, when previously unused RRSP contribution room is depleted!




joncnca said:


> ... this is my first year with a DB pension too, so i'll be looking into this myself. however, my self+employer contributions will not be as much as 18% of my income, so i don't really have the same problem ...


Question is ... how good is the benefit forumula?

The more generous the benefit, the larger the PA and the closer to only earning $600 of fresh RRSP contribution room a year is. 


Cheers


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## joncnca (Jul 12, 2009)

Eclictic12, they should have a 'thanks' button for specific posts, the way they have on some other forums. if they had one here, i'd click 'thanks' for the thorough post reply you made

i admit, i was lazy about the whole 18% thing in my post but i understand what you mean, and thanks for clarifying about the PA.

and on further reflection, you're right. the OP should just monitor RRSP contribution room on the NOA. it already accounts for reduction of RRSP contribution room due to PA


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## Eclectic12 (Oct 20, 2010)

joncnca said:


> Eclictic12, they should have a 'thanks' button for specific posts, the way they have on some other forums. if they had one here, i'd click 'thanks' for the thorough post reply you made ...


Interesting ... I haven't seen that before. You are welcome.




joncnca said:


> ... i admit, i was lazy about the whole 18% thing in my post but i understand what you mean, and thanks for clarifying about the PA ...


I wouldn't call it lazy as "one size does not fit all". 

A DB pension uses a different formula than a DC pension.


Cheers


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