When clients have had several jobs, they might also have several group retirement or pension plans with former employers spread across multiple institutions.
Many new clients are happy to learn that locked-in pension funds from a previous employer can, in many circumstances, be transferred into a self-directed plan held at a single financial institution.
There are many benefits to consolidating these accounts. For one, it can simplify your life by not having accounts spread all over. Consolidating these accounts into one institution also helps with overall planning and the management of your investments.
Depending on the province of employment, a Locked-In Retirement Account (LIRA) or Locked-In Registered Retirement Savings Plan (LRSP) must be opened for the funds to transfer into.
Similar to Registered Retirement Savings Plans having to convert to Registered Retirement Income Funds (RRIFs) in the year you turn 71, Locked-In Retirement Accounts must be converted to a Life Income Fund (LIF), Locked-In Retirement Income Fund (LRIF) or Restricted Life Income Fund (Federal) (RLIF) in your 71st year, with the first minimum withdrawal required in the year you turn 72. This is the latest you can convert your locked-in plan to a LIF or RLIF, and the earliest age at which you can convert your locked-in plan depends on the jurisdiction of the plan.
Locked-in pension funds can be under federal or provincial legislation, with federal plans and each province having different rules. While locked-in funds are generally not accessible until retirement, in some special circumstances the fund may be accessed earlier, depending on the jurisdiction.
Unlocking provisions:
1) Small balance
Federal: individuals can unlock their entire plan in the year they turn 55 or in any subsequent year if their total holdings in all federally regulated LIFs, locked-in RRSPs, Locked-in Retirement Accounts and RLIFs are less than the small balance limit.
The small-balance limit is equal to 50 per cent of the Yearly Maximum Pensionable Earnings (YMPE). For 2024, the YMPE amount is $68,500, so the small balance limit is $34,250 ($68,500 x 50 per cent).
Please note that the small-balance limit will change when the Yearly Maximum Pensionable Earnings change. Individuals who qualify to unlock their plan may do so by transferring their federal regulated RLIF, LIF or LIRA to an unlocked tax-deferred savings vehicle (RRSP or RRIF).
Provincial — British Columbia: If you are under 65, the small-balance provision is allowed if the total value of the locked-in account is less than 20 per cent of the YMPE or $13,700 ($68,500 x 20 per cent), provided the account has not previously been split between locked-in accounts.
If you are over 65, the value of the locked-in account must be less than 40 per cent of the YMPE, or $27,400 ($68,500 x 40 per cent). The unlocked proceeds can be paid out in cash or transferred to the annuitant’s RRSP or RRIF.
2) One-time unlocking at time of transfer
Federal: When rolling federal locked-in accounts into a LIF or RLIF, individuals are entitled to a one-time unlocking of up to 50 per cent of the new LIF or RLIF holding’s market value into an unlocked tax-deferred savings vehicle, such as a Registered Retirement Savings Plan (RRSP) or Registered Retirement Income Fund (RRIF), any time after their 55th birthday.
After we unlock 50 per cent of the plan value, we also assess whether the plan now qualifies to be unlocked under the small-balance provision. Essentially, the small-balance unlocking and the one-time 50 per cent unlocking options may be combined. If they can be, we will send in the same paperwork package both documents for the clients to sign.
Provincial — British Columbia: In British Columbia, a onetime withdrawal at the time of transfer is not permitted.
3) Financial hardship
Federal: Eligible annuitants, regardless of age, who are facing financial hardship can withdraw up to 50 per cent ($34,250) of the YMPE ($68,500 for 2024) per calendar year.
The amounts may be withdrawn annually from a combination of federally regulated accounts (LIF, locked-in RRSP, RLIF, or RLSP), but all withdrawals for that year must be completed within 30 days of each other.
The funds may be transferred to another Registered Plan that is not a locked-in plan such as an RRSP or a RRIF.
The Office of the Superintendent of Financial Institutions (OSFI) has interpreted “withdraw” to be either a cash or “in-kind” withdrawal/transfer.
Financial hardship is defined as follows:
a) Medical or disability related expenditures: Eligible annuitants are those who expect to spend more than 20 per cent of their annual income on medical treatment or other expenses related to their condition or disability.
These annuitants may unlock on an annual basis, up to 50 per cent of the YMPE $68,500 for 2024 ($34,250) for the relevant calendar year. The disability must be certified by a physician licensed to practice in Canada.
The annuitant seeking to make withdrawals based on this category must also attest that they expect to spend more than 20 per cent of his or her income and a description of these expenses.
b) Low income: An annuitant who expects to earn less than the low-income limit of 75 per cent of YMPE, or $51,375 in 2024 ($68,500 x 75 per cent) will be permitted to unlock an amount based on their expected income.
The maximum amount that may be withdrawn is calculated as 50 per cent of YMPE ($34,250 in 2024), less two-thirds of expected annual income. The expected annual income does not include any amounts received as a result of the financial hardship withdrawals.
The annuitant seeking to make withdrawals based on this condition must also attest that they expect to earn less than the low-income limit of 75 per cent of YMPE for that calendar year.
An annuitant can qualify for financial hardship unlocking under both the medical and low-income categories. The total that they may withdraw however between the two is 50 per cent of YMPE, or $34,250 in 2024.
Provincial — British Columbia: Within British Columbia, there are some additional criteria that count to apply for financial hardship unlocking. Annuitants may apply once per calendar year for each of the following reasons:
a) Low income (based on expected income, with a maximum withdrawal of 50 per cent of YMPE)
b) Inability to pay medical expenses that cannot be reimbursed from another source (this includes the cost of renovations to make the house accessible)
c) Eviction from a principal residence due to rent arrears
d) Foreclosure on a mortgage against a principal residence
e) First month’s rent, damage deposit and pet deposit for a principal residence
In these cases, Form 1: “Spouse’s Waiver to Permit Benefits in a Pension Plan, Locked-In Retirement Account or Life Income Fund”, if applicable, is also required.
4) Shortened life expectancy
Federal: If an annuitant finds themselves with a shortened life expectancy, they may receive a currently dated physician’s note that certifies that due to mental or physical disability, the life expectancy of the annuitant of the locked-in retirement vehicle is likely to be shortened considerably. The funds may be paid out in cash or transferred to the annuitant’s RRSP or RRIF.
Provincial – British Columbia: Similar to federal jurisdiction, if a physician certifies that your life expectancy is to be shortened considerably, you may take the funds out of your locked-in plan as a lump sum, or a series of payments. Your spouse, if applicable, must sign Form 1: “Spouse’s Waiver to Permit Benefits in a Pension Plan, Locked-In Retirement Account or Life Income Fund.”
5) Non-residency
Federal: If the annuitant has ceased to be a resident of Canada for at least two consecutive calendar years, and he/she is no longer employed by the employer from which the pension funds originated, they qualify for this unlocking provision.
An annuitant is deemed to be a resident of Canada if he/she has resided in Canada for 183 days or more throughout a calendar year. The annuitant is required to obtain a Canada Revenue Agency confirmation of residency status form to support this.
Provincial — British Columbia: Within British Columbia, the rules are the same as Federally, except annuitants are also required to obtain Form 1: “Spouse’s Waiver to Permit Benefits in a Pension Plan, Locked-In Retirement Account or Life Income Fund” in order to unlock the funds, if applicable.
Minimum and maximum withdrawal percentages
Where LIFs differ from RRIFs is they have both a minimum and a maximum withdrawal percentage.
The minimum LIF payment percentage is calculated the same way as a RRIF account. Up to and including age 70, the minimum required payments are calculated using the age formula, which is the previous year’s closing market value of the plan, divided by 90 less your age [ value of plan on December 31 of the previous year / (90 – Age) ].
For those 71 and over, a prescribed percentage based on your age is multiplied by the previous year’s closing market value of the plan to arrive at the minimum annual RRIF payment. Similar to when opening a RRIF account it is possible to elect the younger spouse’s age if the goal is to have the lowest withdrawal.
Maximums vary by jurisdiction based on a formula established by the federal or provincial pension legislation that governs the pension plan. The maximum payments for a LIF change each year, as the maximums are based on a formula established by the applicable pension legislation.
Within British Columbia, the maximum LIF withdrawal is the greater of the maximum withdrawal percentage and the prior year’s investment returns within that LIF account. This can result in a wide range on a yearly basis depending on the returns earned within the account.
Depending on each client’s situation, we may recommend withdrawing the maximum from LIF accounts to provide for flexibility. While funds can be accessed if needed as shown above, by taking more than the minimum required withdrawal out of the LIF account today, it means that more funds are readily accessible should you need them outside of a locked-in plan.
If you need less than the maximum LIF withdrawal amount each year, the difference between the maximum amount and the minimum amount can be transferred directly to a RRSP (if under age 72) or a RRIF account. The minimum portion of the payment cannot be transferred to an RRSP or to a RRIF account and must be withdrawn and brought into income.
For example, Mrs. Thompson has a LIF account and this year her minimum required withdrawal is $17,000 and the maximum withdrawal is $42,000. Mrs. Thompson just sold a vacation property this year and will have substantial capital gains on the sale, so she wants to keep her other income as low as possible. At the same time, Mrs. Thompson has been working on a strategy to get funds out of her locked-in plan as quickly as possible so there is more flexibility with the funds.
We recommend that Mrs. Thompson transfer the difference of $25,000 ($42,000 - $17,000) into her RRIF account as it accomplishes two of her goals. Her long term goal is to continue with the taking the maximum LIF payment for each year and her short term goal is to not increase her taxable income for the current year. Now Mrs. Thompson has access to withdraw the funds from her RRIF in a future tax year with more flexibility, and when she is in a lower tax bracket.
In the year the account is opened, the client is allowed to withdraw an amount up to the maximum if the transfer came from an LRSP, LIRA, or directly from the client’s pension plan. The maximum is calculated on the plan value as of the transfer date.
Kevin Greenard CPA CA FMA CFP CIM is a Senior Wealth Advisor and Portfolio Manager, Wealth Management with The Greenard Group at Scotia Wealth Management in Victoria. His column appears every week at timescolonist.com. Call 250.389.2138, email [email protected] or visit greenardgroup.com.
