Opinion

Unlocking some of your locked in money

I continue to get many questions on how to unlock locked-in money.

Firstly let me start by explaining what locked-in money is. Employees who retire, terminate their employment early, or find their pension plan being discontinued need to make some important decisions.

Some pension plans are being closed and employees have the “lump sum” or “annuity” option.

Other people are faced with a difficult choice of whether to take a lump sum of money from the pension today, purchase an annuity, or wait to receive a monthly cheque at retirement.

The lump sum option allows the fully vested (owned) pension benefits to be transferred to a locked-in registered plan.

What is a locked-in account?  This type of investment account is registered and is one where the plan issuer signs an agreement with your employer to “lock-in” your pension plan proceeds until retirement.  A lump sum from your pension plan is transferred into the registered locked-in investment account.  The age at which the funds may be released, and to what uses they may be put, vary with the pension legislation governing the plan.  Any amounts earned by the plan also become locked-in.

Withdrawals are generally not allowed from Locked-in Registered Savings Plans (LRSP) or Locked-In Retirement Accounts (LIRA), except in limited circumstances such as shortened life expectancy, small balance or financial hardship.

The governing legislation controls these funds, even though the employee can invest them as they wish (similar to an RRSP).  Some provinces have been changing their legislation with respect to locked-in accounts.

The minimum and maximum withdraw amount will fluctuate from year to year and is based on the year-end value.

The year-to-year amount will vary depending on the amount of money you withdraw, the income your plan earned and any market fluctuations that may occur.

A LIF is similar to a RRIF in that the holder is required to receive a minimum payment out of the plan each year.  The minimum payment levels are calculated using the same method used for RRIF payments.  Additionally, these accounts are subjected to a maximum withdrawal limit. The maximum amount is established by a formula, which takes into account a discount factor and your age.

In the first year a LIF is opened, there is no minimum withdrawal required, however there is still a maximum allowable payment.

This maximum is pro-rated for the number of months, including the month of transfer into the plan, that is remaining in the year.

Remember to always consult your advisor before taking any action.

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Stuart Kirk is an Investment Funds Advisor with Manulife Securities Investment Services Inc and a Retirement Planning Specialist with Precision Wealth Management Inc. The opinions expressed are those of the author and may not necessarily reflect those of Manulife Securities Investment Services Inc or Precision Wealth Management Inc.  For comments or questions Stuart can be reached at stuart@ghicks.com.

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