Individuals who have left or changed their jobs will often have their pension benefits transferred to a Locked-in Retirement Savings Plan (LRSP). This LRSP will be governed by the same federal or provincial pension benefits legislation that governed the original pension.
When the individual is ready to receive retirement income from the plan (sometime between the ages of 55 and 71), one option is to transfer the funds to a Life Income Fund (LIF). The LIF will then act similarly to a regular pension and pay out an authorized annual amount, which will be taxed as pension income to the recipient. The individual cannot increase the amount of pension income to use additional funds from the LIF for such things as paying down personal debt, home purchase, etc. There are very strict limits to receiving additional payments from the LIF, which relate to ceasing residency in Canada and illnesses that will considerably reduce life expectancy. Thus, the LIF is significantly less flexible than a Registered Retirement Savings Plan (RRSP) or Registered Retirement Income Fund (RRIF), which have no limits on the amount that can be withdrawn in a year.
As of May 8, 2008, new rules were introduced for LIFs that stem from federally regulated pensions. These new rules will enable individuals to withdraw funds in excess of the annual limit. There are 3 possible ways to access additional funds. They are:
1) Individuals who are 55 or older and have funds in a federally regulated LRSP or LIF can withdraw all of the funds or transfer the funds to an unlocked tax-deferred plan (such as an RRSP or RRIF) if the amount in the LRSP or LIF is less than $22,450 (this threshold will be adjusted annually). If all of the funds are withdrawn, the amount received is included in the income of the individual. There is no immediate tax consequence on funds transferred to an RRSP or RRIF. Any amounts subsequently received out of the RRSP or RRIF are included in the income of the individual.
2) Individuals 55 or older can convert up to 50% of the LIF holdings into an unlocked tax-deferred plan such as an RRSP or RRIF. The funds remaining in the LIF will be subject to the normal annual withdrawal rules. Funds transferred to an RRSP or RRIF will provide greater flexibility to the individual since there is no limit on the amount of funds that can be withdrawn in the current or any future year. This conversion is only available once for each LIF. The following timing rules apply:
- For LIFs in existence at May 8, 2008, the conversion can be done as soon as the financial institution holding the LIF is able to comply with these new rules.
- For LIFs created after May 8, 2008, this option must be done within 60 days of the creation of the LIF. There are transitional rules that increase this time limit where the steps in the conversion commenced prior to May 8, 2008.
3) Individuals who can demonstrate financial hardship will be able to withdraw up to $22,450 per calendar year. Financial hardship is defined to occur as a result of:
- low income, which is currently set at income less than $33,675; or
- high disability or medical related costs that are expected to exceed 20 percent of income for the year.
Funds held in an LIF are secure from creditors (such as in the case of bankruptcy). This is generally not the case for funds held in an RRSP or RRIF (depending on the province in which the individual resides). While unlocking funds held in an LIF will provide greater flexibility to the individual, the funds may then be exposed to creditors.
An individual wishing to remove funds from an LIF under one of the above options will need to provide attestation from his or her spouse or common-law partner assenting to the transfer or withdrawal. The individual must also attest that he or she:
- is aware of the potential loss of protection from creditors;
- understands that any funds withdrawn may be taxable; and
- understands the need to seek professional advice about the financial and legal implications.
If you currently have an LRSP or LIF, you should consult with your Collins Barrow advisor to determine if these new rules and options apply to you.
Bob Boser is a Tax Partner in the Red Deer office of Collins Barrow.
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