Seniors were given
more flexibility in managing their locked-in retirement funds when federal Finance Minister Jim Flaherty recently announced he was scrapping regulations requiring federally regulated life income funds be converted to annuities when holders reach age 80.

As a result, maximum permitted withdrawals will be recalculated to age 90, after which the holder will be allowed to withdraw all the funds in the LIF. The government says there is nothing to prevent LIF holders and financial institutions from renegotiating existing contracts to take advantage of the new regime.

“Seniors have asked for a greater degree of control over their retirement savings, and this initiative will help give it to them,” says Flaherty.

The change was first proposed in the Liberals’ 2005 federal budget, with proposed amendments to the regulations released in June 2006. The Finance Department says it “received minimal representation on this issue, mostly from representatives of the investment advisor industry.” Comments were universally supportive of the proposed changes, the government says.

Locked-in accounts such as LIFs — which operate like registered retirement income funds and pay out benefits — contain vested benefits transferred out of a registered pension plan and are regulated under federal and provincial pension legislation — not the Income Tax Act — so the rules vary from one jurisdiction to another. Generally speaking, employees who terminate their employment before retirement may be able to transfer accumulated funds out of the employer’s registered pension plan into a locked-in retirement account.

Just as an RPP is intended to provide the individual with an income for life, funds transferred out of the pension plan are supposed to meet the same objective — that’s why they’re locked in. LIRAs — sometimes called “locked-in RRSPs” — operate like RRSPs in that withdrawals are not permitted. And just as an RRSP must be converted to an annuity or a RRIF by the end of the year in which the holder turns 69, a LIRA must be converted to an income stream by that point as well. Then, unlike a RRIF, the rules prescribe both a minimum and maximum annual withdrawal amount so the fund will continue for the person’s lifetime.

Just what rules apply to your client’s locked-in account depend on what jurisdiction regulates the pension plan from which the funds came. Federal pension rules cover only about 10% of the workforce, employed in industries such as banks, communications and transportation companies. Most pension plans fall under provincial jurisdiction.

Although some provinces still have LIFs that must be converted to annuities by age 80, others also offer locked-in retirement income funds that operate like RRIFs and provide income for life. In some provinces, a LIF may be converted to an LRIF, but many provinces have already made their locking-in rules more flexible.

Alberta recently dropped its LRIF requirements and investors may now unlock up to 50% of their locked-in assets if they wish, says Shawn Kauth, director of individual wealth product development at Sun Life Financial Inc. in Waterloo, Ont.

Manitoba is also considering similar arrangements — “Giving greater access to locked-in money, putting more control back in clients’ hands and allowing them to make a broader set of choices,” he adds.

Saskatchewan offers a prescribed RRIF for which there is no maximum withdrawal limit and no requirement to purchase a life annuity. In effect, there is full unlocking of locked-in funds that may be transferred to a regular RRIF when a member reaches the earlier of the plan retirement date or age 55.

As well, the holder’s spouse is automatically named as beneficiary, although spouses may sign a waiver allowing the designation of a different beneficiary.

Kauth points out that people are now living longer and want more control over their assets. Accessing all the funds in a LIF at age 90, as the federal government proposes, helps those who may be thinking about legacy and estate planning, and who may not be concerned about income needs, he adds.

But Kauth also notes that, with the demise of defined-benefit pension plans and increasing numbers of people in defined-contribution plans, there seems to be less need for restrictive locking-in provisions to make sure the individual has an income for life. More and more provinces are getting rid of their annuitization provisions for locked-in funds, he says.

@page_break@“A lot of the locking-in legislation was drafted at a time when defined-benefit pension plans were much more prevalent than they are today,” Kauth says.

He welcomes the idea that people will have greater control over their assets. “Advisors need to help their clients understand what to do with this money when it is unlocked,” he says.

Of course, they also need to pay attention to what the rules are in their own particular jurisdiction, he observes. And if recent history is any indication: “We’ll see more and more jurisdictions become more flexible with their locked-in legislation,” Kauth says, “especially with changing demographics and new financial instruments in the marketplace.” IE