What Is A Pension Adjustment?

What Is A Pension Adjustment?

Written by Corrina Murdoch
Fact-checked by Caitlin Wood
Last Updated October 6, 2021

Retirement planning is one of the most important components of your household’s financial landscape. To accommodate that, many employers have instituted pension plans. Both the employee and the business pay into the fund, accelerating its growth. If your office has a company pension plan, it is particularly important to understand what a pension adjustment (PA) is. Not only does it apply directly to your long-term retirement plan, but it also plays a part in your annual tax filing. By learning how pension adjustments work, and how they apply to you specifically, you can make the best plan for your future. 

What Is A Pension Adjustment? 

A pension adjustment refers to the amount which can be contributed to a Registered Retirement Savings Plan within a set year. Though the term adjustment can be misunderstood as a permanent change, it is actually a monetary amount that is recalculated every time you file your taxes. It is the combined value of both individual and employer pension credits. When planning for your annual RRSP contributions, the pension adjustment is one of the most important factors. There are monetary penalties associated with over-contributing to pensions. To avoid these, it is essential to understand the implications of pension adjustments and how they work. 

How Does A Pension Adjustment Work?

Pension adjustments are calculated by Revenue Canada on an annual basis, with individual adjustment values for each pension. It refers to the estimated value of a specific pension, with each pension being assessed separately. Meant as an equalizing calculation, the purpose behind a pension adjustment is to level the playing field for those both with and without employer-matching pension plans. 

A member participating in any kind of Registered Pension Plan can locate the annual pension adjustment in Box 52 of their T4. The same is true if you are a member of a Deferred Profit Sharing Plan. It accounts for the fact that those with employer-based pensions can save by contributing funds through gross earnings, not getting taxed on that amount. Those governing their own pensions don’t have that benefit. An adjustment is meant to correct that differential. 

Find out what happens to your retirement savings during a divorce.

How To Calculate Your Pension Adjustment?

Relatively straightforward in most cases, the formula is used to determine the pension adjustment on any given account. Revenue Canada calculates the value of nine times your annual accrued benefits. It then takes this figure and subtracts $600 to reach the value of your adjustment. The purpose is to ensure that everyone has equal access to tax assistance. 

Though it is usually a simple process, depending on your approach to contributions, there are different ways the adjustment is calculated. There are three main types, each with slightly different calculations going into determining the adjustment. While your PA will show up on your T4, if you want to double check the math, there are some simple steps you can take. 

Contribution Plan

Also called a defined contribution plan, this is when pension participants invest a pre-set amount. Typically, this comes with an employer-matching program. The value of your pension depends on the quality of the investments in the account, determined at the time of the participant’s retirement. In terms of pension adjustment, it is the cumulative value of both the employer’s and the participant’s contributions. 

For example: 

Salary: $100,000

Employee Contribution: 2%

Employer Matching: 2% 

Total Contributions: 4%

Pension Adjustment: $100,000 x 4% = $4,000

Benefit Plan

Referred to as a defined benefit plan, in these situations, you are guaranteed either a predetermined income or large, one-time payment. The amount is determined by the duration of employment, salary, and age of worker at the time of retirement. The approach to calculating the pension adjustment differs between three main methods: 

  • Set benefit: Also called a flat benefit, this is when the benefits are stated as a financial figure; a dollar amount representing each period (year or month) that the employee worked. An example is the pensioner receiving $50 a month per year of employment at the company. 
  • Average over career: In this case, the pension benefit is determined based on what the participant earned each year they worked. For instance, if you contribute 2% and your employer matches it, the benefit is calculated at 4% for each year you worked.  
  • Best average: Also called the final average, this is determined based on the yearly earnings as averaged over a set period. This is usually calculated based on the best three years of service or the most recent set of years. A good example is determining the PA based on the amount determined by taking the percentage of pensionable salary for the last three years of service. This figure is then multiplied by the years of service. 

Once you know the amount, your pension adjustment is calculated by determining nine times the annual benefit, less six hundred dollars. 

For example:

Defined plan pension adjustment = (9 x annual benefit) – $600

PA = 9 x ($100,000 x 4%) – $600 = $35,400

Deferred Profit Sharing Plan

In this situation, workers gain access to a portion of the profits which the employer pays out. Until it’s withdrawn, employees are not required to pay taxes on either the contribution or the value of it’s growth. It will still be displayed in Box 52 of your T4, but the calculation depends wholly on the company’s post-tax profits. The PA can go to a limit of up to $13,915, according to 2020 data.   

Learn more about the difference between an RRSP and an RSP.

How Do You Report A Pension Adjustment?

The number you report for your pension adjustment is meant to detail the value of your earnings under your pension plan. Whether it is a Deferred Profit Sharing Plan or a Registered Pension Plan, with each passing year and added contribution, it gains value. The adjustment refers to the difference with each passing tax year. Meant as an equalizer, it ensures that an accurate figure is represented each year, factoring things like interest and employer matching. 

Employer Reporting: Box 52

Though your employer will report the amount in Box 52, you are still required to take action. The amount the employer reports accounts for contributions The employer takes into account his contributions to your retirement accounts from both you and the company, considering your current income and any forfeited amounts.  

Tax-Payer Reporting: Line 20600

Despite your employer noting the amount, you still must declare it separately on your return. While it will not impact your income as either a deduction or earnings, it can impact your contribution eligibility for the following year. Accurate reporting ensures that your pension is above board, reducing the chance of issues down the road. 

If in doubt about how much you are eligible to contribute, you can consult Revenue Canada’s online service and access the My Account section of your online portal. It will specifically indicate your contribution limits so that you don’t risk running an overage when planning for retirement. 

Pension Adjustment FAQs

What is a pension adjustment for?

The concept that led to pensions adjustments is premised on equal access to tax benefits. It levels the playing field between those who have retirement help (like a pension plan). Those with a plan through work pay with pre-tax money and are, therefore, able to save more tax-deferred funds. Those without a company pension plan are at a moderate disadvantage, so the adjustment is used to level that out. 

When do you need a pension adjustment?

Anyone who puts money into an RRSP ought to know the pension adjustment. It is a major factor in determining how much you can contribute to your pension (without incurring a penalty). Upon reporting your pension adjustment on your income tax returns, Revenue Canada recalculates your contribution limit for the coming year. The figure changes every year, so it is important to stay apprised of both the PA and contribution limits. 

What is the formula to calculate the PA on a defined benefit plan?

To calculate the pension adjustment on a defined benefit plan, first determine your annual accrued benefit. Either a lump sum or projected income, the annual amount accrued is multiplied by nine. Six hundred dollars is subtracted from this figure, resulting in your set pension adjustment: Defined Benefit PA = (9 x Annual Accrued Benefit) – $600

Final Notes 

Financial planning, especially when it comes to retirement, relies on your keeping track of all aspects of your pension. The annual PA may not seem like a massive figure, but it does play a large role in avoiding penalties. The goal is to grow your investments, defer taxes on the funds you save until retirement, and avoid penalties resulting from overpayments. It’s worth taking the extra time to check your adjustment figure, and to use the RRSP contribution section of the Revenue Canada tax portal. Provided you keep track of your pension, using all available metrics, you can plan for a strong, fulfilling retirement.  


Rating of 5/5 based on 1 vote.

Corrina Murdoch has been a dedicated freelance writer and editor for several years. With an academic background in the sciences and a penchant for mathematics, she seeks to provide readers with accurate, reliable information on important topics. Working as a print journalist for several years, Corrina expanded her reach into the digital sphere to help more people gain insight into the realm of finances. When she's not writing, you can find Corrina swimming and spending time with family.

Click on the star to rate it!

How useful was this post?

Research & Compare

Canada's Loan Comparison Platform

Largest Lender Network In Canada

Save time and money with Loans Canada. Research and compare lenders before you apply. Share your experiences with Canada's top lenders.

Make Smarter Borrowing Decisions

Whether you have good credit or poor credit, building financial awareness is the best way to save. Find tips, guides and tools to make better financial decisions.

Save With Loans Canada

Special Offers

Build Credit With Refresh Financial

Build Credit With Refresh Financial
Popular

Build credit while spending money with the Refresh Financial VISA card.

View Offer
Build Credit For $7/Month

Build Credit For $7/Month
Popular

With KOHO’s prepaid VISA card you can build a better credit score for just $7/month.

View Offer
Make No Payments Until 2022

Make No Payments Until 2022
Ends Soon

Borrow up to $50,000 from our partner, Fairstone, and don’t pay until 2022*

View Offer
Industry Spotlight

What's happening with Canada's credit industry?

goPeer — Helping Consumers Achieve Financial Freedom by Connecting Canadians Looking For Financing With Canadians Looking to Invest

goPeer — Helping Consumers Achieve Financial Freedom by Connecting Canadians Looking For Financing With Canadians Looking to Invest

goPeer is Canada's first consumer peer to peer lending platform and connects creditworthy Canadians looking for a loan with everyday Canadians looking...

Read Post
Locator
Find The Best Rate
In Your Region
OR
Best Personal Loan Provider by Greedy Rates
Icon

Confidential & risk-free

All consultations and conversations with Loans Canada and its partners are confidential and risk-free. Speak with a trusted specialist today and see how we can help you achieve your financial goals faster. Loans Canada and its partners will never ask you for an upfront fee, deposit or insurance payments on a loan. Loans Canada is not a mortgage broker and does not arrange mortgage loans or any other type of financial service.

When you apply for a Loans Canada service, our website simply refers your request to qualified third party providers who can assist you with your search. Loans Canada may receive compensation from the offers shown on its website.

Only provide your information to trusted sources and be aware of online phishing scams and the risks associated with them, including identity theft and financial loss. Nothing on this website constitutes professional and/or financial advice.

Your data is protected and your connection is encrypted.

Loans Canada Services Are 100% Free. Disclaimer

Keep Track Of Your Credit Score

Subscribe with Credit Verify to monitor your credit rating and get your free credit score.