Area of Law: Investments and Securities
Answer # 265
What happens to your Registered Pension Plan when you leave your employment?Region: Ontario Answer # 265
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 registered pension benefits are locked-in, and the amount of money is relatively small, 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 10-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 LIRAs and LIFs
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.
Registered Retirement Income Funds (RRIFs), which are personal retirement income funds offered by financial institutions, are used to provide a flow of minimum payments and are subject to minimum annual income payment requirements. In Ontario, funds from a registered pension plan cannot usually be transferred to a regular unlocked RRIF. Rather, the funds must be transferred into a locked-in account, usually a Locked-in Retirement Account (LIRA).
Although LIRAs are similar to RRSPs, there are two main differences:
- LIRAs are locked-in until retirement, and
- unlike RRSPs, you are not allowed to make further contributions or withdrawals from the LIRA.
Since you cannot withdraw from an LIRA, in order to receive income from the locked-in account, you are required to convert it into another type of account, either an LIF or an annuity.
Life Income Funds (LIFs)
LIFs are tax-deferred plans that pay out the funds in your Registered Pension Plan, Locked-in RRSP or Locked-In Retirement Account over a number of years. With an LIF, you control your investment options, but the payments are determined by both federal and provincial governments. The Canada Revenue Agency (CRA) sets the minimum annual withdrawal limit; whereas the maximum annual withdrawal limit is set by provincial pension laws. You have some flexibility with how much you receive up-to the maximum amount set-out in Ontario’s Pension Benefits Act. You can choose a minimum payment schedule, a maximum payment schedule, or something in between.
Further, payments from an LIF can be made monthly, quarterly, semi-annually, or annually. The maximum annual amount is based on the age of the owner as well as the long-term interest rates. Using these criteria, every year, the Financial Services Commission of Ontario (FSCO) publishes a schedule which gives the percentage of the fund which can be withdrawn for people of different ages.
The holder of an LIF can also designate a beneficiary to receive the LIF on their death. More than one beneficiary can be named. However, if the LIF holder has a spouse, then both pension and family law apply.
Payments made from an LIF are treated as income, for tax purposes, in the year that they are received. The financial institution which manages the LIF will almost always deduct and remit a withholding tax, for amounts over the minimum annual payment amount, to CRA (or, Revenu Québec for Québec residents) on behalf of the LIF holder.
Locked-In Retirement Income Funds (LRIFs)
As of January 2009, Locked-in Retirement Income Funds (LRIFs) can no longer be bought or sold. Funds in an existing LRIF may be transferred to a new LIF, or to an insurance company to purchase an annuity.
LRIFs were created through an amendment to Ontario’s Pension Benefits Act. Holders of LRIF’s can transfer or withdraw up-to 50% of the money in their LRIF. However, as of 2011, you are no longer able to carry forward any unused maximum income payment amounts to future years’ maximum income payment amounts.
Like any other Registered Retirement Income Fund, LRIFs have minimum and maximum pay out levels. Like LIFs, the minimum payment from an LRIF is set by the federal government and the maximum annual payment is set by the province.
Rules for LIFs
As of January 2011, the rules for determining the maximum payment from LRIFs and old LIFs have been standardized with those that govern new LIFs.
In Ontario, with new LIFs, the investor is no longer required to purchase an annuity upon reaching 80 years of age. The federal government also amended the law to increase the options available to holders of federally-regulated LIFs with regard to unlocking their funds. Three of these new options are:
- One-Time 50 Percent Withdrawal: Individuals 55 or older will be entitled to a one-time conversion of up-to 50 percent of old LIFs and LRIFs holdings into an unlocked tax-deferred savings vehicle.
- Small Balance Unlocking: Individuals 55 or older with small total holdings in federally-regulated locked-in funds of up-to $22,450 will be able to wind up their LIFs or convert them to an unlocked tax-deferred savings vehicle.
- Financial Hardship Unlocking: Individuals facing financial hardship (that is, low income, or high disability or medical-related costs) will be entitled to withdraw up-to $22,450 per calendar year.
Option 3: Purchase of 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 regularly over a specified period.
A Life Annuity provides a fixed sum of money for the rest of your life. 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 71.
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, 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.
You now haveoptions: