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Buy back pensionable service time?
I have a question regarding the purchase of pensionable service.
Here are the details:
- my wife has been working part-time with the same employer since 2000
- she made no contributions to her pension plan (Municipal Pension Plan of BC) because she did not work enough hours to get into the pension
- this changed in 2005 when she worked a temporary full-time position and contributions became mandatory
- now that she's in the pension plan (though not vested), contributions are mandatory even though she is back to part-time work
- contributions for 2005 were ~$700, will be ~$1200 for 2006
- my wife will likely only work for the company for another 1-2 years until she stops work to raise the kids...until then will work less than 1/3 full-time equivalent
- we now have the option of going back 5 years and purchasing pension time for her years of working part-time before she got into the pension...this would be equivalent to about 1.5-2 years of a full-time worker's amount but enough to get her vested.
The question: would buying the previous pensionable time be a good idea as the employer has to also put funds into the RPP for my wife? We would eventually transfer the money into a locked-in RSP in 2007/8...since the employer also contributed there would be more money than if my wife just contributed to an RSP herself.
Any comments would be appreciated. Thanks in advance...
"as the employer has to also put funds into the RPP" What more incentive do you need?
lystgl is right. This isn't a situation where buying back service is an attempt to increase a pension. Trying to calculate whether something like that is worthwhile can be a very tricky business. This is much simpler. Your money is going in now and you know it's coming out within a couple of years. If you put some in, the employer will kick some in too. Not only that, it guarantees vesting of current employer contributions. Always take free money.
Thanks for the response. We've sent the Pension people the forms and got back a $5,500 bill from the them. Two ways to pay the bill: 1. transfer from RSP 2. write them a cheque. We have money to do either. I prefer to write a cheque, but wife will only have about $5,000 income this year so would not be able to fully use the RPP payment deduction. Is there any way to carry forward the deduction amount like for an RSP? or better yet have the other spouse claim it? My guess is that the RSP transfer is probably the best way to do this...any thoughts?
rw1029 wrote: My guess is that the RSP transfer is probably the best way to do this...any thoughts? We are going through a similar procedure with my wife's DB pension plan. You will need to check with the rules in your jurisdiction, but AFAIK, your wife will have to have unused RRSP contirbution room to purchase past service with a cash payment. Otherwise, the payment will have to be from an RRSP transfer if she lacks the necessary unused contribution room.
We have done it both ways, my thinking was to have a certain amount of Indexed Income coming in, not having too much cash to try to manage in our latter years. The earlier you buy in , the better, it takes less money to pay for the future benefit.
rw1029 wrote: Thanks for the response. We've sent the Pension people the forms and got back a $5,500 bill from the them. Two ways to pay the bill:.... The rules for financing a DB pension buy-back are complex and, frankly, it's too early on a Sunday morning for me to recall them. Ask if the pension plan has a write-up that explains the options. Many do. Whether or not your wife needs unused RRSP room to accomodate the buyback depends on the type of "past service pension adjustment" created. If the buyback is for service before 1989 or '90 -- I forget which -- it's better to use cash because that generates an extra tax deduction without affecting RRSP room. But, IIRC, your wife's service was only a few years ago. I believe your plan is for her to buy the pension service with the intention of commuting those credits in the near future when she leaves the job. The goal is to qualify for vesting and thus get the value of the employer's funding (at least 50% of the cost of the benefit to be provided). ISTM that if the plan calls for the money to move to a locked-in RRSP in just a few a few years, there's not a material difference between leaving it in the RRSP or using the RRSP to fund the buyback. When the smoke clears, the money will still be in an RRSP under her control, albeit with a lock-in.
Thank you for the responses so far. We've received an invoice from the pension people (Municipal Pension Plan of BC). They want $15,005 [this is the correct amount; my previous post gives a wrong figure] payment which will give my wife: - 2.64 years of service credit (2000-2006) @ salary of $39,409 - $6,417 past service pension adjustment (PSPA). Question: 1. Is the PSPA the amount that the employer has to kick in? 2. Say my wife quits work in a year or two...is (roughly) our contibution + PSPA + interest what we can expect to transfer out into an Locked-in RSP? Thanks.
rw1029 wrote: 1. Is the PSPA the amount that the employer has to kick in? No, the PSPA is a deduction that you take off of your wife's income tax return in the year in which the past service was purchased. 2. Say my wife quits work in a year or two...is (roughly) our contibution + PSPA + interest what we can expect to transfer out into an Locked-in RSP? No, you would be looking to transfer out current PV value of the plan + further contributions + interest. Check with your pension administrator. Your wife maybe able to leave her pension assets in the plan vs. transferring to a LIRA. This maybe preferrable if MPPBC is portable and can be transferred into another RPP at a later date if/when your wife returns to the workforce. A detailed analysis will need to be performed to determine what is the most advantageous course of action.
scomac wrote: No, the PSPA is a deduction that you take off of your wife's income tax return in the year in which the past service was purchased. No, the PSPA is a retroactive pension adjustment that reduces your wife's RRSP contribution room. The buyback relates to years in the past. It grants her more pension accrual for those years. Thus, her pension membership for those years becomes more valuable and the PSPA now goes back and adjusts her 18% tax shelter umbrella to accommodate that. Does this mean she has to withdraw money from her RRSP? Maybe, maybe not. Not if she uses RRSP money to pay for the buyback. Possibly if she doesn't. That will depend on the amount of the PSPA and how much unused RRSP room she has available.
BruceCohen wrote: scomac wrote: No, the PSPA is a deduction that you take off of your wife's income tax return in the year in which the past service was purchased. No, the PSPA is a retroactive pension adjustment that reduces your wife's RRSP contribution room. Right, I knew that. Just forgot. That's what I get for not going back to my course notes first.
"as the employer has to also put funds into the RPP" What more incentive do you need?
lystgl is right. This isn't a situation where buying back service is an attempt to increase a pension. Trying to calculate whether something like that is worthwhile can be a very tricky business. This is much simpler. Your money is going in now and you know it's coming out within a couple of years. If you put some in, the employer will kick some in too. Not only that, it guarantees vesting of current employer contributions. Always take free money.
Thanks for the response. We've sent the Pension people the forms and got back a $5,500 bill from the them. Two ways to pay the bill: 1. transfer from RSP 2. write them a cheque. We have money to do either. I prefer to write a cheque, but wife will only have about $5,000 income this year so would not be able to fully use the RPP payment deduction. Is there any way to carry forward the deduction amount like for an RSP? or better yet have the other spouse claim it? My guess is that the RSP transfer is probably the best way to do this...any thoughts?
rw1029 wrote: My guess is that the RSP transfer is probably the best way to do this...any thoughts? We are going through a similar procedure with my wife's DB pension plan. You will need to check with the rules in your jurisdiction, but AFAIK, your wife will have to have unused RRSP contirbution room to purchase past service with a cash payment. Otherwise, the payment will have to be from an RRSP transfer if she lacks the necessary unused contribution room.
We have done it both ways, my thinking was to have a certain amount of Indexed Income coming in, not having too much cash to try to manage in our latter years. The earlier you buy in , the better, it takes less money to pay for the future benefit.
rw1029 wrote: Thanks for the response. We've sent the Pension people the forms and got back a $5,500 bill from the them. Two ways to pay the bill:.... The rules for financing a DB pension buy-back are complex and, frankly, it's too early on a Sunday morning for me to recall them. Ask if the pension plan has a write-up that explains the options. Many do. Whether or not your wife needs unused RRSP room to accomodate the buyback depends on the type of "past service pension adjustment" created. If the buyback is for service before 1989 or '90 -- I forget which -- it's better to use cash because that generates an extra tax deduction without affecting RRSP room. But, IIRC, your wife's service was only a few years ago. I believe your plan is for her to buy the pension service with the intention of commuting those credits in the near future when she leaves the job. The goal is to qualify for vesting and thus get the value of the employer's funding (at least 50% of the cost of the benefit to be provided). ISTM that if the plan calls for the money to move to a locked-in RRSP in just a few a few years, there's not a material difference between leaving it in the RRSP or using the RRSP to fund the buyback. When the smoke clears, the money will still be in an RRSP under her control, albeit with a lock-in.
Thank you for the responses so far. We've received an invoice from the pension people (Municipal Pension Plan of BC). They want $15,005 [this is the correct amount; my previous post gives a wrong figure] payment which will give my wife: - 2.64 years of service credit (2000-2006) @ salary of $39,409 - $6,417 past service pension adjustment (PSPA). Question: 1. Is the PSPA the amount that the employer has to kick in? 2. Say my wife quits work in a year or two...is (roughly) our contibution + PSPA + interest what we can expect to transfer out into an Locked-in RSP? Thanks.
rw1029 wrote: 1. Is the PSPA the amount that the employer has to kick in? No, the PSPA is a deduction that you take off of your wife's income tax return in the year in which the past service was purchased. 2. Say my wife quits work in a year or two...is (roughly) our contibution + PSPA + interest what we can expect to transfer out into an Locked-in RSP? No, you would be looking to transfer out current PV value of the plan + further contributions + interest. Check with your pension administrator. Your wife maybe able to leave her pension assets in the plan vs. transferring to a LIRA. This maybe preferrable if MPPBC is portable and can be transferred into another RPP at a later date if/when your wife returns to the workforce. A detailed analysis will need to be performed to determine what is the most advantageous course of action.
scomac wrote: No, the PSPA is a deduction that you take off of your wife's income tax return in the year in which the past service was purchased. No, the PSPA is a retroactive pension adjustment that reduces your wife's RRSP contribution room. The buyback relates to years in the past. It grants her more pension accrual for those years. Thus, her pension membership for those years becomes more valuable and the PSPA now goes back and adjusts her 18% tax shelter umbrella to accommodate that. Does this mean she has to withdraw money from her RRSP? Maybe, maybe not. Not if she uses RRSP money to pay for the buyback. Possibly if she doesn't. That will depend on the amount of the PSPA and how much unused RRSP room she has available.
BruceCohen wrote: scomac wrote: No, the PSPA is a deduction that you take off of your wife's income tax return in the year in which the past service was purchased. No, the PSPA is a retroactive pension adjustment that reduces your wife's RRSP contribution room. Right, I knew that. Just forgot. That's what I get for not going back to my course notes first.