If your client has a life income fund (LIF) that earned big returns in 2024, they may have the opportunity to unlock a larger portion of the LIF this year, depending on the governing province.
Pension regulations in B.C., Alberta, Manitoba, Ontario, and Newfoundland and Labrador have maximum payment calculations for LIFs that take into account the previous year’s investment earnings, and 2024 was a great year for investors.
“It’s definitely an important planning point, but it’s one that can be easily missed” because the opportunity may not be available every year, said John Natale, head of tax, retirement and estate planning services with Manulife Investment Management in Oakville, Ont.
In B.C., Alberta, Ontario and Newfoundland, the maximum LIF payment is the greater of the LIF withdrawal limit or the LIF’s investment return in the previous year. (Manitoba’s calculation is a bit different. For example, to the investment return in the previous year, Manitoba adds 6% of the value of transfers in from a locked-in retirement account or pension plan during the current year.)
The difference between the withdrawal limit and investment return could be significant. For example, the LIF withdrawal limit for someone aged 55 is 6.51% in these four provinces, and the S&P/TSX Composite Index returned 18% in 2024 — a difference of 11.49%.
Clients are typically required to withdraw an annual minimum from a LIF (2.86% for someone aged 55), and they can transfer the excess (18% – 2.86% = 15.14% in this example) or any portion of the excess to their RRIF or RRSP (if they are under the age of 71). This tax-free direct transfer requires no contribution room, and it gives clients greater flexibility with their registered assets: RRSPs have no minimum or maximum annual withdrawals, and RRIFs have only the annual minimum withdrawal.
Transfers from LIFs allow some of the money to be unlocked every single year, said Adam Chapman, founder of YESmoney in London, Ont. “And then when there’s a big return year … you can unlock a lot more,” depending on the province’s pension regulations. (The jurisdiction of a LIF or locked-in retirement account is determined by where the employee worked and was living at the time they contributed to the pension plan, not the current province of residence of the account owner. Quebec allows those aged 55 or older to withdraw up to the entire value of a Quebec-regulated LIF.)
Chapman said that in recent years when interest rates were low, commuting the value of a defined-benefit pension plan was an attractive opportunity, “which means there are a lot of people out there right now that have very big LIRAs [locked-in retirement accounts] or LIFs.”
Transfers allow clients to unlock not only LIF value, but also the future growth on that value, Natale said.
Making the magic happen
The financial advisor prepares a letter of direction for the transfer from the LIF to the RRSP or RRIF. Then, a T2030 or T2033 direct transfer form (for transfer to an RRSP or RRIF, respectively) is filled out.
The T2030 generates offsetting receipts (T4RIF and 60L) that won’t have matching values, so advisors may need to explain that to clients, Chapman said. The T4RIF will report both the payment amount (i.e., income) and the amount transferred; the offsetting 60L will report the amount transferred, which can be deducted on the client’s tax return.
A warning: If the client receives income-tested benefits that don’t account for deductions, those benefits could be negatively impacted. An example is the Ontario Student Assistance Program, Natale said.
Chapman suggested that a client’s annual LIF withdrawal shouldn’t be set to the maximum in the provinces that take into account the previous year’s return. If the withdrawal is set to maximum and returns exceed that limit, “now all of a sudden the client has unexpected taxable income coming in,” he said. “If they happen to also be drawing OAS [old age security] at the time, you may inadvertently be pushing them into an OAS clawback zone.”
As such, it may make sense to set the LIF to the minimum withdrawal, he said, and transfer the excess to the client’s RRSP or RRIF each year.
As far as the timing of unlocking, “you can do it throughout the year, because the maximum allowable payment doesn’t change,” Chapman said, referring to the four provinces.
A down market at time of transfer would technically provide an advantage by leaving the LIF with less value and the RRSP or RIFF with more value. “When the markets recover, you’ve gone back up to your original amount and you’ve grown the RIFF instead of the LIF,” Chapman said. But waiting for a down market isn’t advisable, he said, because you can’t time the market. “If it happened to happen, then it’s … an added bonus for the people who can make those transfers, stay invested, and have that money recover in the RIFF,” Chapman said.
Unlocking opportunities
Chapman noted the benefit of regularly unlocking LIF value, and described a scenario in which someone exhausted the income from their RRSPs and TFSAs and was left with their LIF. “They’re stuck with an account they can’t access,” given the LIF’s maximum limit, he said.
Chapman works with retirees and specializes in retirement income, so “instead of adding money to an RRSP every year for RRSP season, we’re LIF unlocking,” he said. “It’s just part of our process.”
In some jurisdictions, a client can unlock up to 50% of a LIRA when they first convert to a LIF, Natale said. “There are very significant time constraints, so you want to make sure you comply with the rules,” he said. In Nova Scotia, one-time unlocking provisions (along with other pension measures) will come into effect on April 1.
Also, the first year a client converts a LIRA to a LIF, the LIF minimum is zero, Natale said (just as it is for a RRIF in the first year it’s opened). “That means you can take the full maximum that year and transfer it to an unlocked RRSP or RRIF.”
Some provinces, including Ontario, prorate the withdrawal amount in the first year, he said, so in those cases, the client would want to convert a LIRA to a LIF as early in the year as possible.
Another tip: If the client’s spouse is younger, use the spouse’s age to set up the LIF minimum, Natale said. That way, “the spread between the minimum and maximum is larger,” allowing the client to unlock a greater portion of the LIF each year.
“The idea is to chip away at the LIF until you can do the small account balance unlocking,” Chapman said — an opportunity when the LIF drops to a certain value.
Pension legislation also allows LIFs to be unlocked under conditions such as shortened life expectancy or financial hardship. “The key is to confirm the pension jurisdiction that your LIF is governed under and then look at the rules,” Natale said.