A client recently asked us:
“I took time off for maternity leave and now that I’m back at work, I’ve been told I can buy back my pension. What does that mean—and should I do it?”
Great question. Pension buybacks (also called service buybacks) can be a valuable option, but they’re not always straightforward. Let’s break down what they are, why people consider them, and what you need to weigh before making a decision.
What Is a Pension Buyback?
A pension buyback is an agreement to purchase a period of prior service in your pension plan—usually time when you weren’t contributing, such as:
Maternity or parental leave
Extended unpaid leave for illness or caregiving
Other approved unpaid absences
By buying back this service, you increase your pensionable service, which typically means:
A higher pension benefit when you retire
Possibly qualifying for earlier retirement
How Does It Work?
If you choose to buy back service, you’ll need to pay the cost calculated by your pension plan administrator (don’t worry—you don’t have to figure this out yourself). You can fund the buyback in three ways:
Cash (non-registered funds) — but you need enough RRSP contribution room because the buyback reduces your RRSP room through a PSPA (Past Service Pension Adjustment).
RRSP transfer — if you have enough funds in your RRSP, you can transfer directly without tax consequences.
Combination of both — cash plus RRSP.
Advantages
Higher retirement income: More pensionable service usually means a bigger pension.
Earlier retirement: You may meet eligibility requirements sooner.
Employer matching: Your employer must also contribute, which boosts the value.
Better survivor benefits: If applicable, these may increase too.
Disadvantages
Loss of control: Funds in a pension plan are locked in—you can’t invest them yourself or access them early.
No flexibility: Unlike RRSPs, you can’t withdraw funds whenever you want.
Irreversible decision: Once you buy back, you can’t undo it.
Uncertain value: The extra pension benefit might end up being less than what your money could have earned if invested elsewhere.
Key Considerations
Life expectancy: Longer life expectancy favors buybacks because pensions protect against outliving your money.
Pension plan health: Check the solvency ratio. Underfunded plans can reduce benefits (remember Nortel and Sears retirees).
Your retirement goals: Do you want predictable income or flexibility for big expenses later?
RRSP room: If you plan to use cash, confirm you have enough contribution room.
Bottom Line
A pension buyback can be a smart move—but it’s not for everyone. It depends on your health, financial goals, and the strength of your pension plan. If you’re considering this option, we can help you run the numbers and make an informed decision.
Want to talk it through? Reach out to one of our Certified Financial Planners today.