When members of a defined- benefit (DB) pension plan voluntarily leave their job or are terminated, they may transfer the commuted value of their pension assets to a locked-in retirement account (LIRA). Those assets become a source of retirement income, but without the predetermined lifetime guaranteed benefit of the DB plan from which the assets were transferred.
Alternatively, and subject to the rules of the DB plan, the commuted value could be left in the DB plan to provide the client with a defined retirement benefit, says Prem Malik, chartered professional accountant and financial advisor with Queensbury Securities Inc. in Toronto.
The amount of pension assets that can be transferred to a LIRA is subject to a maximum transfer value (MTV) prescribed in the Income Tax Act, based on the client’s age and the commuted value of the assets.
If the commuted value of the assets exceeds the MTV, the excess amount can be: taken in cash as taxable income; transferred to an RRSP, provided the client has sufficient contribution room; left in the DB plan if the plan’s rules permit; or used to purchase a life annuity from an insurance company.
LIRAs are similar to RRSPs, but clients cannot make additional contributions to LIRAs nor do clients have access to the funds until they retire (except under certain conditions).
As the term “locked in” implies, access to the LIRA’s assets is subject to restrictions based on either federal or provincial rules, which vary among jurisdictions, says Todd Sigurdson, director of tax and estate planning with Investors Group Inc. in Winnipeg. These restrictions are in place to ensure the assets in the LIRA are used as they originally were meant to be used: to meet the client’s retirement needs.
However, a LIRA – like an RRSP – gives clients control over investment decisions based on their personal objectives and risk tolerance, says Heather Holjevac, senior wealth advisor with TriDelta Financial Partners Inc. in Toronto.
Notably, the rules regarding the eligible age to receive retirement income are not standardized among the provinces. Consequently, some clients may have access to their commuted assets earlier than others.
“If a DB plan crosses multiple jurisdictions,” Malik says, “the rules of the jurisdiction in which the plan is registered [will] govern.”
When a client is ready to retire, he or she may transfer the assets to a life income fund (LIF), known in some provinces as a locked-in retirement income fund (LRIF), based on the eligible retirement age in the province in which a LIRA is registered.
A LIF (or LRIF) is similar to a registered retirement income fund (RRIF) and requires a minimum withdrawal each year. But a LIF also has a maximum withdrawal, which varies by province, Sigurdson says.
For example, the minimum age in Ontario to convert a LIRA to a LIF is 55; in Alberta, the minimum age is 50. There is no minimum age in Manitoba, Sigurdson says: “You can convert to a LIF at age 30.”
Although the assets held in a LIRA are locked in, there are several ways in which your client can unlock all or a portion of the assets – but, again, the rules vary among provincial jurisdictions. Those unlocking options include:
– One-time conversion. Clients 55 years of age and older are entitled to a one-time conversion of up to 50% of their locked-in assets into an RRSP or a RRIF. RRSP contribution room is not required in this case. Some provinces, such as British Columbia and Nova Scotia, do not permit one-time unlocking.
– Small balances. Clients over age 55 who have locked-in assets equivalent to less than 40% of the yearly maximum pensionable earnings (YMPE) can convert their locked-in account to an RRSP or a RRIF. The YMPE, which is the maximum amount on which contributions to the Canada Pension Plan are made, is $54,900 in 2016; so, small balances must be $21,960 or less. In B.C., small balances equivalent to less than 20% of the YMPE can be withdrawn at any age.
– Low anticipated income. Clients whose income in a given year is expected to be low can apply to withdraw money from their locked-in account. The amount of the withdrawal varies and is based on 50% of the YMPE, or $27,450 in 2016 for zero anticipated income. No withdrawal is allowed if income is anticipated to be 75% of YMPE, or $41,175.
– Shortened life expectancy. If clients have a life expectancy of two years or less, as certified by a medical practitioner, they can get access to the full value of their locked-in assets.
– Non-residency. Clients who have been non-residents of Canada for at least two years can access all of their locked-in assets.
– Financial hardship. Clients can access a portion of their locked-in assets to pay expenses such as rent, medical bills and child support.
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