When someone leaves employment or otherwise ceases to be a member of a registered pension plan, portability options are generally available for the accumulated pension benefits from the duration of the employment. Commonly, a person may transfer or commute the value into some type of locked-in retirement savings plan, like a locked-in registered retirement savings plan (RRSP) or locked-in retirement account (LIRA).
Such plans may continue to be invested and earn tax-sheltered income, but no withdrawals are allowed. When the person wishes to begin taking income, a transfer may be made to a plan type from which withdrawals are permitted. This could be a life income fund (LIF), a locked-in retirement income fund (LRIF) or a prescribed retirement income fund (PRIF), depending on applicable pension legislation.
In this article, we’ll outline the rules regarding maximum withdrawals associated with those latter types of plans. Next month we’ll look at exceptions to the rules that may entitle a person to unlock some or all of the money in such plans.
Why is there locking in?
While retirement savings are frequently discussed in terms of their tax treatment, it is the pension law of the province (or federal authority) that governs locking-in provisions.
Pension law generally deals with the rights and obligations of employers as contributors, employees as members and the role of pension administrators. In large part this is focused on assuring the savings of and for employees/members is available to support them in retirement.
In a sense, locking-in rules reach beyond the employment relationship to assure that a former pension member does not deplete funds before retirement and draws upon them in a measured manner during retirement.
Maximum withdrawals by jurisdiction
The accompanying table shows the percentages/factors the respective jurisdictions apply to determine maximum withdrawals. Basically, the factor is applied to the market value of the plan at the beginning of the year to derive the maximum allowable withdrawal. For some provinces, that is the entire calculation for a LIF. However, for Alberta, British Columbia, Manitoba and Ontario, the maximum annual withdrawal is the greater of this calculation and the dollar value of the market growth in the preceding calendar year.
Those who meet qualifying conditions in Manitoba and Saskatchewan may make transfers to a PRIF that is not subject to maximum withdrawals. Prince Edward Island has not implemented pension standards legislation, so potential transfers will generally depend on the pension contract.
An LRIF bases withdrawals entirely on a series of market-value calculations, irrespective of annuitant. While common in the past, most provinces have discontinued LRIFs or combined those market-value rules with their LIF rules.
Compared to minimum withdrawals
Tax rules require that a minimum amount be withdrawn from a retirement income fund, locked-in or otherwise, though there is no required withdrawal the year a plan is established. As opposed to the pension law rationale for protecting against excessive depletion, the minimum withdrawal is the government’s way of forcing eventual income recognition and tax revenue.
To limit the effect of those forced minimum withdrawals, a pensioner may use a younger spouse’s age for the withdrawal calculation. There is no corresponding rule for locked-in maximums; the maximum is always based on the annuitant’s own age.
Transferring the excess amount to a registered retirement income fund (RRIF)
While the minimum amount is required to be taken as income, an annuitant may transfer the excess amount (up to the maximum) to a RRIF (or even an RRSP if the person has not reached age 71). This is done using Form T2030.
