What Is Pension Adjustment (PA)?
A pension adjustment (PA) is the amount a member of a Canadian Registered Retirement Savings Plan can contribute in a given year.
Understanding Pension Adjustment (PA)
More specifically, a pension adjustment (PA) is an estimation of the value of an individual’s pension and the value assigned by the Canada Revenue Agency each year to each accruing pension. Members of a Registered Pension Plan or a Deferred Profit Sharing Plan will find their annual PA amount on their T-4 slip in Box 52.
- A pension adjustment (PA) is the amount a Canadian Registered Retirement Savings Plan member can contribute annually.
- The PA ensures that all taxpayers have access to comparable tax assistance.
- The PA is an aggregate of all annual individual and employer pension credits.
- For a defined contribution plan, the PA is the sum of the employer and employee plan contributions.
- The formula for calculating the PA on a defined benefit plan is (9 x annual accrued benefit) - $600.
A member can choose to contribute the PA amount to their Registered Retirement Savings Plan. In some circumstances, this contribution may also be deferred until a time when the tax deduction is more advantageous.
The PA was established by the Canada Revenue Agency to benefit individuals saving for retirement by reducing the RRSP contribution limit for employees with Registered Pension Plans (RPP). The PA ensures that all taxpayers have access to comparable tax assistance, regardless of the type of pension plan in which they participate. Membership in a group RRSP does not provide a PA or pension credit to an individual taxpayer.
The PA is an aggregate of all individual and employer pension credits for the year. For each year of service, an employee receives a pension credit for each DPSP or benefit provision of an RPP. For the most part, an employee participates in only one provision, so in most circumstances, their pension credit will also be their PA.
The RRSP system sets an upper limit for tax-assisted retirement savings at 18% of earned income each year. This limit applies to the total of contributions to RRSPs, Money Purchase provisions of RPPs, and DPSPs, as well as benefits accrued under Defined Benefits provisions of RPPs.
There are two types of RPP: Defined Contribution plans, and Defined Benefit plans. PA calculation is dependent on the type of plan in which an individual participates.
PA Calculation Under a Defined Contribution Plan
Participants in a Defined Contribution pension plan put in a set amount, often with an employer match, and their payout is dependent on the performance of account assets by the time the participant retires.
DC plan participants tend to have a simpler time calculating their PA each year as the PA will be the sum of the employer and employee contributions to the plan.
Thus, if an employee making $50,000 per year contributes 2 percent of their earnings to the plan and their employer matches that contribution, their PA for that year will be $2,000.
PA Calculation Under a Defined Benefits Plan
Conversely, participants in a Defined Benefit pension plan are made aware of the benefit they can expect to receive at retirement, and this figure will be reported each year on the participant's annual pension statement. These plans are usually managed exclusively by the employer.
The standard formula for calculating PA on a DB pension is as follows:
- (9 x annual accrued benefit) - $600
The annual accrued benefit varies from employer to employer. Assuming a plan provides a 2 percent accrual rate, an employee making $50,000 per year on a DB plan would result in a PA of $8,400:
- (9 x ($50,000 x .02) - 600) = $8,400
Since many employers are not capable of offering accrual benefit rates as high as 2 percent, the Pension Adjustment Reversal system was established to assist employees in restoring the RRSP contribution room.