Beginning Jan. 1, 2025, Quebec will allow those aged 55 or older to withdraw up to the entire value of their provincially regulated life income fund (LIF) as part of a broader set of changes the province is making to its pension plan regulations.
Under current legislation, individuals with a Quebec-regulated LIF are subject to both an annual minimum withdrawal requirement and maximum withdrawal limit, as is the case in other jurisdictions. Quebec’s changes to the regulations remove the maximum limit, beginning next year.
With the change, individuals who have Quebec-registered LIFs will have greater control over the amount of annual retirement income they receive and more tax planning flexibility, said Serge Lessard, assistant vice-president, regional tax, retirement and estate planning services, wealth, with Manulife Investment Management in Montreal.
For example, retirees could choose to withdraw as much as they like each year from their LIFs to fund lifestyle expenses, allowing them to defer Quebec Pension Plan (QPP) and old age security (OAS) payments, which would in turn boost the value of those benefits.
Quebecers receive a 0.7% boost in QPP benefits for each month they defer their government pension withdrawals beyond age 65. And under new rules that became effective this year, Quebecers can defer QPP payments until age 72. They can also receive a 0.6% boost in OAS for each month they defer between age 65 and 70.
“That’s a very good planning strategy in many situations,” Lessard said.
A LIF is a type of RRIF that holds funds from a locked-in retirement account (LIRA). Withdrawals from a LIF are taxable as income.
A LIRA is used to hold a lump-sum payment or the commuted value of a company pension plan when someone leaves a job. LIRA holders can’t make further contributions to the account or withdraw from it except under certain conditions, such as financial hardship or shortened life expectancy, allowed by the governing legislation.
LIRAs and LIFs are regulated provincially, meaning the plans differ from province to province. There are also federally regulated LIRAs (called locked-in RRSPs) and LIFs, which cover federally regulated and territorial pension plans.
The jurisdiction of a LIRA/LIF 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 LIRA/LIF owner. This means someone could have a Quebec-registered LIF but now live outside the province.
Like an RRSP conversion to a RRIF, a LIRA must be converted to a LIF by the end of the year the LIRA holder turns 71.
The elimination of the withdrawal limit makes Quebec pension plan legislation one of the most flexible in the country.
In Saskatchewan, an individual 55 and older can transfer their entire LIRA to a prescribed RRIF, which isn’t subject to an annual maximum withdrawal limit. The province doesn’t have a LIF option.
In Manitoba, someone 55 and older can transfer up to 50% of their LIRA or LIF to a prescribed RRIF on a one-time basis, while someone 65 and older can transfer the entire amount.
In both provinces, the LIRA/LIF holder needs their spouse’s consent to transfer the LIRA to the prescribed RRIF. Under Quebec’s revised regulations, a spouse’s consent is not needed for the account holder to withdraw the full amount from the LIF.
Beginning Jan. 1, 2025, Quebec is also eliminating the ability of LIF holders to make a direct transfer from a LIF to an RRSP or RRIF. Under current rules, a person could transfer a certain amount from their LIF to an RRSP/RRIF each year.
Lessard said that holders sometimes transfer LIF amounts to an RRSP/RRIF to plan around Quebec’s priority of payments rules, which mandate that in most cases a spouse automatically receives amounts from a LIF on the death of the account holder, regardless of contrary direction in a will.
By transferring amounts from a LIF to an RRSP/RRIF, the individual can have greater control over how funds held in those plans are distributed at death. This type of planning is now eliminated under the new rules.
Of course, someone who withdraws amounts from a LIF under the new regulations would be avoiding, to some extent, the need to consider the priority of payments rules. But they would have to balance that avoidance with the tax implications of the withdrawal, Lessard said: “If you don’t want to pay your taxes up front, in one shot, you probably won’t want to [make a big withdrawal].”
This article appears in the November issue of Investment Executive. Subscribe to the print edition, read the digital edition or read the articles online.
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