Staying with one company from your 20s into your 60s was at one point a normal career path. However, on average Canadians will work for four or five companies throughout their career, and this number is larger for millennials. Therefore, it is likely that you will transition companies a few times prior to retirement. If your current organization entitles you to a vested pension, upon job transition you will have the opportunity to transfer your funds into a locked-in registered account. Pension regulations are designed to ensure that your accumulated pension funds will be used to provide a lifetime retirement income and so, they do not allow for lump sum withdrawals. As Canadians seek more flexible pension regulations, provincial and federal governments have responded to allow for additional maturity options, outside of just Life Annuity.
A Registered Retirement Savings Plan (RRSP) has a locked-in alternative known as a Locked-In RRSP or Locked-In Retirement Account (LIRA).
If you need to retrieve income from your LIRA you have a few options that I will discuss below. The pension legislation that will govern the maturity options for your locked-in plan is the legislation of the province you last worked. Pension legislation can be confusing because rules are applied based on the origin of the pension plan and not where you are currently living or where your funds may reside. However, within certain industries such as, banking, communications and transportation, locked-in plans are governed by the Federal Pension Benefits Standards Act. In rolling over your pension funds, it is important to work with a Certified Financial Advisor who can help you to realize and maximize your maturity options.
Registered Retirement Income Funds (RRIF)
This is a good maturity option for individuals who are looking to maintain flexibility and control over their retirement assets. All investment growth and income generated by the assets in a RRIF are tax-sheltered until withdrawal. The main difference between a RRSP and RRIF is that instead of building retirement income through making regular contributions, an RRIF provides you retirement income by allowing for regular withdrawals. A minimum annual payment must be withdrawn from your RRIF starting the year you open your account. This minimum annual payment is calculated based on your age and is reflected as a percentage of your RRIF value at the beginning of each year. If your spouse or partner is younger than you, the annual payment is calculated based on their age. This will result in a minimum payment that is lower than the estimate based on your age. In 2015, the Federal Budget reduced the age percentage factor for individuals aged 71 to 94. This new factor means that your minimum annual payments will be lower, allowing you to preserve RRIF income over a longer period of time.
Life Income Funds (LIF)
A LIF can be understood as a Locked-In RRIF. A LIF still requires you to take a minimum payment out each year but there are two major differences with this plan. First, while a RRIF does not impose a maximum withdrawal limit, a LIF does. Second, if your LIF is subject to the legislation of Newfoundland, you must purchase a life annuity by the end of the year of your 80th
birthday. Your maximum LIF payment will vary by the provincial legislation the LIF was created and your age. Additionally, within the first year your LIF is opened, you are not required to make a minimum annual payment.
Locked-In Retirement Income Funds (LRIF)
A LRIF has minimum and maximum payments; however you are not required to purchase a life annuity as you are with a LIF plan. The maximum payment withdrawal is chosen based on the greatest value of your investment earnings in the past year, the market value less the net value of all transfers made in and out of the plan, or if funds are rolled over from a LIF, the maximum payment in the second year is equal to the investment earnings from the previous year of both LIF and LRIF plans. In the first two years of your LRIF account, the maximum rate is 6%, only in the third year does the calculation apply.
Prescribed Registered Retirement Income Funds (P-RRIF)
Depending on your provincial legislation, you may be able to roll over your LIF or LRIF into a P-RRIF. A P-RRIF offers you more access to your retirement income as there is no maximum annual withdrawal limit.
Alternatively, most provinces will allow access to a LIRA under certain conditions. You may be able to unlock your funds in the following cases:
- Shortened life expectancy
- Becoming a non-resident of Canada
- Financial hardship
- Lump-sum unlocking of funds (50% of funds)
- The balance of all of your locked-in accounts in less than the provincial threshold
Locked-in plans are valuable options for individuals looking to manage their retirement income. A locked-in plan allows for you to gain more flexibility in planning and managing how you will live out the remainder of your life. If you would like to discuss your situation in more detail, please contact a member of Faheem Allidina & Associates.