While pension assets represent an important source of retirement income, locking-in restrictions can hamper retirement income planning flexibility. By making full use of maximum withdrawal limits, thousands of dollars of pension savings can be unlocked while remaining tax-sheltered.
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. You are able to unlock a portion of your locked-in savings without losing the benefit of tax-sheltered investment growth.
If you are looking for additional retirement income flexibility, there is a straightforward strategy that can unlock some of these locked-in funds. If you need less than the maximum LIF withdrawal amount each year, the difference between this maximum amount and the amount actually withdrawn from the plan can be transferred directly to a Registered Retirement Savings Plan (RRSP) if you are 71 or younger, or to a Registered Retirement Income Fund (RRIF). The advantage? You are able to unlock a portion of your locked-in savings without losing the benefit of tax-sheltered investment growth. The unlocked funds can be used when the need arises, without maximum withdrawal restrictions.
An in-depth look
Pension legislation imposes a maximum amount that can be withdrawn from LIFs because these plans hold pension assets that remain under pension legislation. If the maximum amount is not withdrawn from a locked-
in plan, it continues to be locked-in, even though the individual had an opportunity to withdraw it. Any unused amounts between the minimum and maximum amounts, however, can be transferred to a regular RRSP for those 71 or younger, or to a RRIF each year. This unlocks assets that would otherwise remain locked-in while maintaining the tax-sheltered investment growth. While the person may not need immediate access to these funds, they gain future flexibility in their retirement income planning.
Here is a tip: If funds are currently in a Locked-in Retirement Account (LIRA), individuals can transfer to a locked-in plan such as a LIF as soon as pension legislation allows. This is typically at age 55, but varies by province — Alberta is age 50; Manitoba, Quebec, New Brunswick and funds governed by federal legislation have no age requirements.
Following this course of action means they will need to make their annual withdrawals earlier than they might have planned — but they benefit by the unlocking occurring earlier as well. Note: Some provinces do not allow a transfer back to a LIRA once the LIF option is chosen.
Don’t need 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 contribution or to make a tax deductible interest payment on money borrowed for investment purposes.
Other options for unlocking
In order to provide more flexibility in meeting financial needs during retirement, several pension jurisdictions now provide individual’s with the opportunity to unlock some or all of their locked-in funds. Some pension jurisdictions have introduced a limited one-time opportunity to transfer a portion of LIF funds to a regular RRSP, for those age 71 or younger, or RRIF. This means individuals may be able to unlock 25 to 50 per cent of their locked-in savings without losing the benefit of tax-sheltered investment growth. The amount that’s left remains locked-in and is subject to the annual minimum and maximum withdrawal limits. Some provinces offer a prescribed RRIF (PRIF) that can be used for funds transferred from a pension plan or from a LIF. With a PRIF, the funds remain subject to the applicable pension legislation but there is no limit on the maximum annual payments. The investments in a PRIF continue to benefit from tax-sheltered investment growth.
Ideal candidates
An unlocking strategy for pension savings is worth considering for those who:
• Are relying or plan to rely primarily on pension funds as their main source of retirement income
• Are looking for more flexibility in terms of access to their retirement savings
• Anticipate needing less than the maximum amount from their LIF over the next several years
The unlocking strategy is an easy one to carry out each year. You simply need to:
• Select the minimum withdrawal amount (or the amount needed as income) from the LIF and complete form T2030 once a year to transfer any leftover maximum to an RRSP (for those under age 71) or to a RRIF. This is a direct transfer, so no RRSP contribution room is required and there is no withholding tax.
Remember to always consult your advisor before taking any action.
Written by Stuart Kirk, CIM
Stuart Kirk is an Investment Funds Advisor with Manulife Securities Investment Services Inc and a Retirement Planning Specialist with Precision Wealth Management Ltd. The opinions expressed are those of the author and may not necessarily reflect those of Manulife Securities Investment Services Inc or Precision Wealth Management Ltd. For comments or questions Stuart can be reached at stuart@precisionwealth.ca or 250-954-0247.