Buying Prior Service if You can’t transfer
If you have contributions with another Registered Pension Plan (RPP) that doesn’t have a transfer agreement with LAPP, you may be able to take a lump-sum payout of those funds and buy some or all of that service under LAPP.
Buying prior service will increase your pensionable service. This means that your future LAPP benefit will be higher and you might be able to retire with an unreduced LAPP pension sooner.
Before you begin this process, there are many factors you will need to consider. We encourage you to speak to an independent financial advisor before deciding to remove your benefit from your previous RPP. However, there are other important considerations which you should bear in mind:
Am I Eligible?
You can only establish your service under LAPP from a previous RPP if you are able to take the payout of your benefits from that plan as a lump-sum.
Any service earned before 1992 under another RPP cannot be established as prior service under LAPP.
What Will it Cost?
The cost of prior service is based on what amount of money is required today to fund what your pension will be in the future for that period of service. This type of costing is called actuarial reserve, and includes assumptions about potential interest changes over time, as well as your salary, age, and life expectancy.
The value of the lump-sum benefit you receive from your previous RPP may be less than the cost of buying the equivalent prior service under LAPP. This means that you may not get credit for all of your prior service unless you pay for any resulting shortfall.
Visit our online Buyback Estimator to get an estimate of the cost to buy your prior service. You can apply to buy a period of prior service through your employer’s pay and benefits coordinator. If the prior service is from a period of previous employment, we may need information from your previous employer.
Contact us or your employer’s pay and benefits coordinator will be able to help you determine when this is the case.
How Will it Impact My LAPP Pension?
You can estimate how buying prior service might affect your pension by using the online Pension Estimator:
1. Visit the LAPP Pension Estimator
2. Click on the button next to "Check here to provide your own service estimate"
3. Run two pension estimate calculations:
- One with only your current LAPP service; or
- One that includes your current LAPP service PLUS the prior service.
Compare these two estimates to see how buying prior service will impact your LAPP pension. You should also consider the cost of the prior service, the length of time it will take you to pay for the prior service, and how long it will take for the increase in your pension to offset the cost of buying the service. You should also consider the impact that a Past Service Pension Adjustment (PSPA) might have on your RRSP contribution room.
Can I Change My Mind?
Removing your pension benefit from your previous plan is very likely an irrevocable decision.
Are There Locking-In Requirements?
The lump-sum payout from your previous RPP may be locked-in. Before deciding to remove your benefits, it is important to know if the locking-in rules applicable to those benefits will allow your funds to be transferred into LAPP. Most RPPs are subject to the locking-in rules of the jurisdiction (i.e. province) in which the benefits are accrued.
If those funds are used to buy prior service with LAPP, they will be administered in accordance with the Alberta locking-in rules.
In certain situations, benefits paid out from an RPP must remain “locked-in” (LIRAs, RPPs, etc.) until they are used to fund your retirement. Financial institutions are responsible for ensuring these funds stay locked-in.
Are There Tax Consequences?
Removing the benefit from your previous RPP to purchase your prior service under LAPP may have tax consequences that should be considered.
For service after 1989, the tax rules require that you have adequate RRSP room to allow for the certification of the PSPA associated with the prior service you are buying. This PSPA represents the value allocated by the Canada Revenue Agency (CRA) to the increase in your LAPP benefit entitlement and will reduce your RRSP contribution room. Please make sure you understand how this PSPA may affect your ability to buy the service. You should also make sure you understand how you can use a qualifying transfer from a registered retirement savings plan (RRSP) or locked-in retirement account (LIRA) to reduce or eliminate the PSPA that is reported to CRA.
What Are The Deadlines?
If you’ve decided to buy your prior service, your application should not be made until your lump-sum benefit has been removed from your previous RPP. You can speak to your employer for more information on how to apply to buy prior service. Once you have applied you will be sent a Buyback Proposal that lists the following:
- How much it will cost you to buy the prior service;
- How much service you can buy;
- How to pay for your prior service; and
- When your election and payment(s) must be made by.
If the period you have requested to buy is not eligible for purchase, it will not be included in the Buyback Proposal.
