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Dear Nancy,

I am 67 and about to retire. I am a member of the federal superannuation plan with just 6 years of service, but I have 3 years of prior service that I can purchase. The purchase price is $57,000 which, if I proceed with the purchase, I was told by the pension centre will get me a monthly pre-tax benefit of $421 per month. Rather than have an employer pension of approximately $900 per month, I'd receive with the buyback $1,321 per month.

Some friends say it's a no-brainer and to go for the buyback. Others say hold onto the $57,000, you can do better by self-directing the $57,000 into an investment portfolio.

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Do you have any suggestions?

Thanks,

Robert

Dear Robert,

The deciding factor in this situation is your life expectancy. This question is similar to whether or not someone takes their CPP payment before age 65. The early payment penalty is 0.5-0.6 per cent for each month they receive CPP benefits before age 65.

For your situation I have made a couple of calculations for comparison.

With the increase of your pension income of $421 per month, this equates to $5,052 per year. It would take just over 11 years for you to get back your purchase amount of $57,000.

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If you invest the $57,000 and get a compounding yield of 5 per cent (assuming reinvestment of any income and growth), yet still withdraw $5,052 per year, at the end of year 11 you would have a balance of $24,486. At that same 5-per-cent yield and withdrawal amount, the funds would run out after the 16 year when you would be 83.

Obviously there are many variables and assumptions, so ultimately it comes down to:

  • do you think you will live past age 83?
  • will you get an average yield of 5%?
  • will you or someone else maintain the investment and cash distributions to you?
  • what are the successor provisions of the pension plan?
  • do you prefer the flexibility of access to the funds if you look after it?
  • what are your estate plans?

So as vague as it may seem, my suggestion is for you to look at the numbers and decide what is best for you. Do you want the peace-of-mind in having the pension fund company do it for you or would you like to do it yourself?  Also, will you live to 83?  For your information, in 2012 the average life expectancy in Canada for men was 80.

The other factor I have not addressed or taken into consideration is the taxation of the additional income, so you would have to take that into account as well. Pension income would be taxed at a higher rate than dividend income from a Canadian source or capital gains.

Have a professional financial plan done to ensure all aspects are explored.

Nancy Woods is an associate portfolio manager and investment adviser with RBC Dominion Securities Inc. Visit her website www.nancywoods.com or send an email request to asknancy@rbc.com. You can send your questions to asknancy@rbc.com as well.

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