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Ontario|Investments & SecuritiesGeneral 265 What happens to your Registered Pension Plan when you leave your employment? When individuals leave their employment, they may be entitled to receive a portion of the assets in the company's pension plan. They must then determine what do to with these funds.
The first step is to gather necessary information from the company's personnel department. There will be certain options regarding the type of plan into which the funds may be transferred. Under pension legislation, you may be prevented from immediately withdrawing pension benefits from your employer's plan on your departure from the company. This legislation is commonly referred to as "locking-in" legislation.
- Option 1: Purchase of Locked-in RRSP
If your pension benefits are locked-in, then you have the option of transferring the pension funds into a locked-in RRSP. Locked-in RRSP's are subject to the same restrictions on withdrawal of funds as the original pension plan. For example, you cannot usually access the locked-in plan funds until you are within ten years of the retirement date set out in the plan documents.
With a locked-in RRSP, you cannot make additional contributions, but you can decide how your retirement savings are invested. This makes a locked-in RRSP a popular choice with people who are leaving an employer's registered pension plan. If you were to have any additional RRSP room available, you would be advised to open another RRSP account, and in fact many people have both a regular RRSP and a Locked-In RRSP.
- Option 2: Purchase of LIFs or LIRFs
In the case where the employee is within 10 years of the retirement date set out in the pension plan document, he or she can use the plan funds to purchase a special retirement account that will provide a lifetime income or an annuity.
Two types of special retirement accounts are Life Income Funds, 'LIF's for short and Locked-In Retirement Funds, or 'LRIF's for short. LRIFs have recently been created through an amendment to Ontario's Pension Benefits Act . A Life Income Fund and a Locked-In Retirement Fund are both types of Registered Retirement Income Funds, but with additional restrictions.
Like any other Registered Retirement Income Fund, a minimum amount must be withdrawn each year. As well, under an LIF or an LRIF, there is a maximum amount that can be withdrawn until age 80. Thus, the funds remain "locked-in" just like a pension or locked-in RRSP. Also, with an LIF the investor is required to purchase an annuity upon reaching 80 years of age.
- Option 3: Purchase of Life Annuity
If the employee is within 10 years of the retirement date set out in the pension plan document, and he or she does not want to purchase a special retirement account, he or she can purchase an annuity. An annuity provides a fixed sum of money on a regular basis over a specified period.
A Life Annuity can be purchased from an insurance company and individuals can defer receiving payments until the age when they want to begin withdrawing funds. This would be the earliest date permitted by law, but no later than age 69.
The amount of income you receive annually will be determined when you purchase the annuity contract. With this option, you have no control over your funds. You cannot allow for changes in the rate of inflation or take action to affect the return on your invested funds. You surrender control of the funds to the issuer of the annuity in exchange for steady future payments.
One exception is in the case of an individual facing shortened life expectancy due to terminal illness or physical disability. As a result of amendments to the Pension Benefits Act, effective March of 2000, these individuals are permitted to gain access to funds in locked-in accounts or pension plans. A physician's certificate and the consent of the individual's spouse or same sex partner regarding survivor benefits must accompany the formal application. Any further questions concerning these recent changes should be directed to your lawyer or financial advisor.
Before deciding on a payment option, it is advisable to discuss the various choices with a financial advisor who will consider all of your financial circumstances.
RRSPs AND RRIFs
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