Individuals with pension savings often transfer these assets to a locked-in plan, such as a Life Income Fund (LIF), to provide retirement income. While a LIF provides a certain degree of flexibility, the annual minimum and maximum withdrawal limits can restrict retirement income planning. If you are looking for additional retirement income flexibility, making full use of the maximum withdrawal limits can allow you to unlock some of these locked-in funds without losing the benefit of tax-sheltered investment growth.1
An in-depth look at the issue ... and the opportunities
Because LIFs hold pension assets, they are subject to pension legislation. Pension legislation imposes an annual maximum amount that can be withdrawn from a LIF. If the maximum amount is not withdrawn from a locked-in plan in a given year, it continues to be locked in, even though the individual had an opportunity to withdraw it. Remember too, that any growth or investment earnings that might derive from that amount also remain locked in.
If you have no immediate need for the funds, any withdrawal above the minimum amount each year can be transferred directly to a regular Registered Retirement Savings Plan (RRSP) for those 71 or younger, or to a Registered Retirement Income Fund (RRIF). This does not affect RRSP contribution room and there is no withholding tax.
The advantage? You are able to unlock a portion of your locked-in savings without losing the benefit of tax-sheltered investment growth, and gain future flexibility in retirement income planning because the transferred funds are no longer restricted by maximum withdrawal limits.
Don’t need the income?
You may still want to consider an unlocking strategy as early as possible. The minimum payment you have to take into income can be used to make your annual RRSP or TFSA contribution.
Funds currently in a Locked-in Retirement Account (LIRA) can be transferred to a locked-in plan such as a LIF as soon as pension legislation allows, which varies by province. Following this course of action means individuals will need to begin annual withdrawals earlier than they might have planned – but they benefit by the unlocking occurring earlier.
Other options for unlocking funds
Some pension jurisdictions have introduced a limited one-time opportunity to transfer a portion of a LIF to a regular RRSP, for those 71 or younger, or to a RRIF. This means individuals may be able to unlock up to 50 per cent of their locked-in savings without losing the benefit of tax-sheltered investment growth.
Some provinces offer a prescribed RRIF (PRIF) that can be used for funds transferred from a pension plan or from a LIF. In a PRIF, the funds remain subject to the applicable pension legislation but there is no maximum annual payment. The investments in a PRIF continue to benefit from tax-sheltered investment growth.
An unlocking strategy for pension savings is worth considering for those who:
If you have clients who could benefit from this information, send them a copy of our easy-to-read piece (MK1394), which is available here
Making it work
Richard is a 55-year-old investor in Ontario who transfers a $250,000 LIRA to a LIF.
In the first year he can unlock the full amount (i.e., the maximum payment) allowed since there is no minimum. In the second year, at age 56:
Assuming the funds earn an annual return of five per cent, Richard can transfer $81,000 to an RRSP or RRIF over a 10-year period. And since Richard also unlocks the future investment earnings on any amount transferred, the total amount unlocked over the 10-year period becomes $103,000. If a younger spouse’s age was used to calculate the RRIF minimum, more funds could become unlocked each year.
For LIFs in British Columbia, Alberta, Manitoba, Ontario, and Newfoundland and Labrador, the maximum payment is the greater of the factor based on the individual’s age and the factor based on the previous year’s investment returns. Many individuals experienced very strong returns in 2019, resulting in significant increases in their maximum payments. In some cases, maximums more than doubled. This presents a great opportunity to unlock funds.
Source: Manulife Investment Management, Bloomberg.
The unlocked funds can provide significant opportunities – providing the financial flexibility to meet changing financial needs during retirement, or for an emergency situation should it arise.
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