Evaluating A Pension Buyback
Deciding whether to buy back pensionable service can be complex. When you’ve taken time away from work, such as a parental leave or a sabbatical, you can end up with gaps in your pensionable years. It’s common to wonder if you should put money back into the plan to make up for that time.
How do you evaluate whether this is a “smart” decision? Adding more guaranteed retirement income is almost always a financially sound decision, but the value is not the same for everyone and has a downstream impact that may not be immediately apparent. Depending on your situation, your money might create more benefit elsewhere. The challenge is deciding whether it’s the right move for you.
Your plan administrator will usually give you a buyback proposal outlining the cost and the projected increase to your future defined benefit pension. That’s your starting point.
From there, you want to understand how much additional lifetime income you’d gain, the criteria for reductions to your pension, the cost of buying now compared to buying later, and what happens to survivor benefits. After that, putting these pieces into the context of your full financial picture can bring clarity to the decision. This includes the income streams you expect in retirement, your spending goals, how things would change if a spouse passed away early, and what’s important for you to leave behind when you’re gone.
Buyback Considerations
Reduction Factors
Will buying back service help you to qualify for an unreduced pension? Pension plans each set their own rules for reductions, and they can vary a lot. Age is a common criterion, like reaching the age of 65. Another common criterion is an age plus service formula, where age and years of service add up to a specific number, such as 80 or 90. This often has a catchy name like the “80-Factor”. An example is a 55-year-old with 25 years of service having achieved an 80-factor, although some plans require multiple criteria to be met together.
If you plan to retire before meeting these criteria, your pension may be reduced, and the size of the reduction varies widely. Some plans reduce by 3% per year, up to a maximum (such as 30%). Others reduce by over 6% per year, with no maximum reduction.
A buyback that results in a meeting of unreduced pension criteria will have a greater benefit than a buyback that doesn’t impact the reduction. Also, a buyback that lowers the reduction by 6% will have a greater impact than lowering the reduction by 3%. Because each plan’s rules, your work history, and your retirement timing are all unique, the impact of a buyback can look very different from one person to the next.
Indexing
Does the plan offer indexing? Indexing means your pension payments rise each year, often called a Cost-Of-Living-Adjustment (COLA). Not all COLAs are created equal! Some plans offer full indexing to the Consumer Price Index (CPI), while some index at a percentage of CPI, some intend to offer COLAs but aren’t contractually obligated to, and some don’t index at all.
The difference is meaningful. A $50,000 pension that started in 1995 would need to pay $90,000 to $100,000 in 2025 to maintain the same buying power, so when you weigh the value of a buyback, the presence or absence of indexing can significantly change the long-term benefit.
Survivor Benefits
If one spouse is far more financially engaged or comfortable managing money than the other, that can be a point in favour of a buyback. In the event of a premature death of one spouse, a larger pension may guarantee a more stable income for the survivor without requiring them to manage an investment portfolio on their own.
Not all survivor benefits are created equal, either. Many plans offer a 60% survivor pension, others pay 50%, and some let you choose from a range of options up to 100%. Understanding the survivor pension rules of your plan helps you judge how much value a buyback is adding.
Buyback Timing
Buying back service at the time of leave can also be a great idea because buying back service later can be much more expensive. Some plans offer an “initial purchase window” (Fuse Research 2025) where the employer may continue to pay their share of the contributions to the plan, although this may require you to pay for your contributions out of pocket when you’re not earning income. Outside this window, you could be responsible for paying for both the employer and employee portions, making the buyback more expensive.
Another factor is that instead of paying the usual percentage of your salary towards your pension, you may end up paying the full amount the plan expects it will need to fund the extra pension you’d receive1. A raise received after returning to work may also increase the cost of buying back2, and a 2-decade gap between parental leave and retirement would not be uncommon, resulting in a significantly higher salary and thus required cost to buy back. According to Fuse Research, many pension plans estimate that the cost of buying back could be 3 or more times higher if purchased outside the initial window3.
Medical Coverage
If your pension plan offers the opportunity to participate in medical, dental or extended health insurance coverage, but requires that members have a minimum number of years of service to participate, that would be an additional consideration.
Estate And Survivor Implications
If you’re using your Registered Retirement Savings Plan (RRSP) to fund a buyback, it’s important to think about how that affects your estate. RRSPs and Registered Retirement Income Funds (RRIFs) are assets your beneficiaries can inherit directly, while the estate value of a pension usually comes with limits. Many pensions offer a guarantee period, often five to fifteen years, where any remaining payments in that window would be paid to your estate if you and your spouse both pass away early. After that, there is usually no remaining value for your adult beneficiaries. If leaving an inheritance to your kids is a priority, buying back may not line up with your estate goals.
It's worth noting that the survivor’s expected pension might not be sufficient. A survivor pension of 50% may not be enough to fund the survivor’s expenses. Depending on your investment approach and how you expect markets to perform, it’s possible their survivorship period in retirement could be better funded with additional RRSP/RRIF money.
Retirement Implications
How your pension aligns with your future expected spending should be a priority consideration in evaluating a buyback, because pensions lock you into a fixed retirement income stream. In “Retirement Income for Life” by Fred Vettese (2023), an evaluation of retirement spending patterns in Canada, Germany, Sweden, the U.K., and the U.S. shows that retirees’ spending often starts declining in real terms around age 70-74. By age 90, modelling showed that the average spending in real dollars had reduced by 20-25%4. The takeaway is that maintaining the exact amount of purchasing power throughout your retirement may be unnecessary.
Assuming you will receive Canada/Québec Pension Plan (CPP/QPP) and Old Age Security (OAS), these government benefits are fully indexed to Consumer Price Index (CPI), so they are designed to maintain purchasing power over time. Assuming no clawbacks of OAS, that portion of your retirement income is guaranteed and inflation-protected. With these considerations in mind, do you need to ensure you have the same amount of total indexed income throughout retirement? Or, could flexibly drawing on RRSPs/RRIFs to fund your highest-spending years in early retirement be the most valuable use of your money?
Summary
A pension buyback can be a great way to strengthen your retirement security, but it will work best if it fits neatly into the bigger picture of your financial life. The rules around reductions, whether your plan is indexed, the survivor income it provides, how the costs to buybacks change over time, and what the decision means for your estate all matter in evaluating a pension buyback. For some people, the added value is worth it. For other people, keeping money in RRSPs offers more flexibility, a bigger estate, and may be a better match for how spending tends to change throughout retirement. To evaluate a buyback, take the time to understand your plan and your own financial goals. These steps can make the decision clearer and help you make the best use of your money.
Hannah McVean is a Certified Financial Planner with Objective Financial Partners, a fee-only, advice-only financial planning firm in Canada. She works with clients from all walks of life and from all over the country, providing objective, unbiased financial advice. Hannah specializes in tax planning to improve cash flow and ensuring a seamless integration between the financial plan and the tax return.
1 https://optrust.com/.
2 https://mpp.pensionsbc.ca/cost-considerations.
3 Fuse Research, How Defined Benefit Pensions Can Help Their Members Navigate Financial Decisions
4 Retirement Income for Life by Fred Vettese (2023), Chapter 5, “Setting an Income Target for Future Years”.