If your client’s pension money was moved out of the plan before their retirement date, it was likely transferred to a locked-in retirement account (LIRA) — an RRSP for money originating from a pension plan. By the end of the year the client turns 71, the LIRA must be converted to a life income fund, or LIF.
Unlike RRSPs and RRIFs, LIRAs and LIFs have withdrawal restrictions and special unlocking provisions specific to the provincial or federal pension legislation. These include one-time unlocking, periodic unlocking and temporary income, and each comes with its own costs and benefits.
LIF one-time unlocking
Some jurisdictions allow people of a certain age to make a one-time, lump-sum withdrawal (usually up to 50% of the balance) from a LIF either in cash (which is taxable) or via a transfer to an RRSP or RRIF (which is not).
Table 1: Jurisdictions offering one-time lump sum unlocking
|Age minimum||50||55||Year before pension’s earliest retirement age, usually 54||Any age||Year you turn 55|
|Unlocking amount||Up to 50% of LIF||Up to 50% of LIF||Up to 50% of LIF||3 times the annual maximum payment up to 25% of the LIF balance||Up to 50% of the restricted LIF balance|
|Transfer to RRSP and RRIF||Yes||To prescribed RRIF only||Yes||To RRIF only||Yes, and cash can then be withdrawn if desired|
Note: The remaining provinces and territories either do not have their own pension legislation (PEI, Yukon, Northwest Territories and Nunavut) or do not offer the one-time unlocking option (B.C., Saskatchewan, Quebec, Nova Scotia and Newfoundland). Saskatchewan allows a LIRA to be converted to a prescribed RRIF, which allows for 100% unlocking at any time.
LIF periodic payment unlocking
All provinces require a minimum payment from a LIF annually, calculated in the same way as the minimum withdrawals from RRIFs. The maximum payment varies by jurisdiction and is a percentage of the value of the account on Jan. 1. Usually, amounts withdrawn from a LIF above the minimum can be received in cash or transferred to an RRSP or RRIF. In Alberta, B.C., Newfoundland, Ontario and Manitoba, the maximum payment is the greater of the maximum percentage based on the individual’s age and the previous year’s investment return.
Quebec, Nova Scotia and Newfoundland allow an annual withdrawal called temporary income in addition to the minimum/maximum payments.
Table 2: Jurisdictions offering temporary income
|Age range||Any age up to Dec. 31 of the year you turn 65||55 to 64||55 to 64|
|Maximum amount||40% of maximum pensionable earnings ($23,480 in 2020)||50% of year’s maximum pensionable earnings ($29,350 in 2020)||40% of year’s maximum pensionable earnings ($23,480 in 2020)|
|Reduced by other income sources?||Yes, for applicants under 54 years of age||No, reduced by LIF income only||No, reduced by LIF, pension income (excluding CPP) and life annuity contracts purchased with pension funds|
|Ability to transfer amounts above minimum to RRSP or RRIF||Yes, up to the maximum transferrable amount||No, if temporary income is paid||Unclear|
Example of planning opportunities
Jean-Sebastien (62), Marie (64) and Claude (66) are siblings. They have locked-in funds under Quebec, federal and B.C. legislation, respectively. Jean-Sebastien and Marie retired in December 2019. Claude retired in 2018. All are interested in maximizing their LIF unlocking options and minimizing the associated tax in the current year, while meeting their income needs. Each had LIF balances of $500,000 on Jan. 1, 2020.
Jean-Sebastien will take his temporary income, which is $23,480. As a result, his transfer amount is the lesser of his 2020 maximum payment and the difference between the maximum income and his 2020 minimum payment.
Marie will transfer the 50% lump sum amount to her RRSP and take the maximum payment as income.
Claude will transfer his payment amount above the minimum to his RRIF. His maximum payment is the greater of his investment return (12% last year) and the rate for a 66-year-old (7.52%).
Table 3: Transfer options by the numbers
|LIF balance Jan. 1||$500,000||$500,000||$500,000|
|Adjusted life income||$26,667||–||–|
All amounts transferred are non-taxable. However, different are paths taken to that end result. First, LIF withdrawals taken as taxable income (cash and transfers to RRSP) will be reported by the financial institution on a T4RIF. For RRSP transfers, such as in Marie’s case, the LIF income is reported by her along with a deduction on line 20800, after completing Schedule 7.
For LIF withdrawals directly transferred to a RRIF, as in Claude’s case, there will be no tax reporting because it is treated as a direct transfer.
Drawing an income from a LIF comes with restrictions. When the temporary income option is available, it can increase a client’s income today above the cap of the maximum payment. The one-time unlocking option can provide a taxable lump sum today or the option to transfer that lump sum to an RRSP or RRIF, thus releasing it from the limitations of the maximum payment.
Finally, any annual payments exceeding the LIF minimum can also be transferred. Amounts transferred from a LIF to a RRIF or RRSP are not taxable (though transfers to an RRSP require additional tax reporting), which usually comes as a surprise. That said, the benefits of freeing money from a LIF can outweigh the costs of that reporting.
Curtis Davis, FMA, CIM, RRC, CFP, is senior consultant for tax, retirement and estate planning services, retail markets at Manulife Investment Management.