KNOWLEDGE EXPECTED OF: CFP® Professionals Only
- Define a pension buyback.
- Explain a pension buyback.
- Identify reasons why a pension plan member may buy back a pension, such as:
- Increased pensionable service
- Increased pension amount
- Increased pension benefit for survivors
- Decreased time to retirement date
- Security from fluctuating income in retirement
- Identify factors that are taken into consideration in the actuarial value of the future expected benefit, such as:
- Interest rate expectations
- Inflation expectations
- Investment return expectations
- Life expectancy based on mortality tables
- Assumed retirement age
- Assumed marital status
- Assumed age difference between spouses
- Allowance for taxation
- Allowance for pension indexation
- Identify that the buyback cost of a pension is the actuarial value of the future expected benefit based on the expected circumstances for an average member of the pension plan.
- Identify that the present value of the additional expected benefit from the pension buyback is based on the personal circumstances of the individual (or the individual and their spouse).
- Explain that the personal circumstances of an individual (and their spouse) may differ from the average pension plan member, resulting in the actuarial value differing from the present value of the expected benefit.
- Identify factors that may cause the actuarial value and the present value of a pension buyback to be different, such as:
- Actual life expectancy of individual (and spouse)
- Actual retirement age
- Amount of income needs
- Timing of income needs
- Marital status
- Actual difference in ages between spouses/partners
- Other income sources
- Identify that a pension buyback will result in a past service pension adjustment (PSPA).
- Explain the impact on Registered Retirement Savings Plan Deduction Limit resulting from a pension buyback.
- Identify the expected past service pension adjustment (PSPA) based on a pension buyback.
- Identify if sufficient Registered Retirement Savings Plan Deduction Limit exists to allow for a pension buyback.
- Identify methods that may be used to buy back pension.
- Cash payment
- Direct transfer of Registered Retirement Savings Plan assets
- Explain the risks that may be associated with a pension buyback, such as:
- Funds used for buyback are locked-in
- Decision may not be reversed
- Loss of investment control
- Explain how each of the factors may impact the suitability of buying back pension credits, such as:
- Actuarial value of the expected future benefit (cost)
- Present value of the expected benefit (benefit)
- Level of confidence with which pension income will be paid
- Requirement for non-fluctuating income
- Solvency of the pension plan
- Solvency of the former employer
- Statutory protection of pension income
- Control over timing the receipt of income
- Control over investment decisions
- Impact on assets/pension upon death
- Other sources of income
- Family dynamics
- Health of individual
- Investment philosophy
- Investment experience
- Risk tolerance
- Tax impact
- Personal attitudes/preferences
- Evaluate how each of the factors may impact the suitability of buying back pension credits.
- Explain the Canada Revenue Agency’s requirements for a tax-deferred transfer of capital property to or from a defined benefit pension plan upon the breakdown of a relationship between spouses.
Glossary of Verbs (mouse over to see definition)
To state exactly the meaning of
To be aware of / to recognize and correctly name / to locate an appropriate resource
To make clear the meaning of / to describe something in more detail or reveal relevant facts or ideas related to it
To note the similarities and differences between two or more things
To determine an approximate value for
To find the value using mathematics
To change from one form or purpose to another
To reach a conclusion or make a judgement through careful study
To give the meaning of / to construe or understand / to translate orally