Like many retired or semi-retired Manitobans, Elaine St. George received a letter in the mail recently from her financial institution that has her a little bit perplexed about the future of a substantial portion of her retirement savings.
"I received notification from my bank that, as a result of new Manitoba legislation, LRIFs (locked-in retirement income funds) are being discontinued and all existing plans must be transferred to a Manitoba life income fund (Manitoba LIF)," she writes in an email.
The letter has raised a few interesting questions for St. George -- as it likely has for many other individuals with these locked-in income funds -- regarding how she will manage her retirement money in the future.
But before addressing her concerns, those of us who are less familiar with the somewhat complicated rules regarding locked-in income funds might need a little background.
At the end of May of this year, the Pension Benefits Amendment Act came into effect in Manitoba, making several changes to pension regulations. Among these amendments is the aforementioned mandatory conversion of LRIFs to LIFs, which will come into effect at the end of this year.
Debbie Lyon, the superintendent of pensions at the Office of the Superintendent Pension Commission, says this particular amendment was enacted to streamline and simplify the rules regarding locked-in income funds because, to put it plainly, the current rules made managing either fund a pain in the butt.
"Right now, in Manitoba, we have two locked-in RIFs," Lyon says. "One is the life income fund (LIF) and the other is the locked-in retirement income fund (LRIF)."
By the end of this year, only one type of fund will be available: the life income fund.
Many financial institutions, however, are requesting their clients with an LRIF make the conversion before that date, Lyon says.
Those individuals who do not elect to make the conversion before the end of the year will automatically have their LRIF converted to an LIF. (Those with existing LIFs do not have to make the conversion.)
LRIF owners, however, should meet their banker, Lyon says, because if they allow the transfer to happen automatically they are limiting their options. Besides transferring the money to an LIF, they actually have three other choices.
"LRIF owners can transfer their balances to a pension plan if it permits the transfer," she says.
Or, they can transfer the money back into a LIRA (locked-in retirement account) or a locked-in RRSP if they want to defer income again.
"The other thing an LRIF owner can do is transfer the funds to a life annuity with an insurance company," she says. "It's either one of those three options, or by the end of the year, you must have your financial institution transfer your LRIF into the new LIF."
While this seems like a bother, the change is intended to provide more flexibility for individuals with locked-in income funds.
Under the old rules, which are in place until the end of the year, both the LIF and LRIF are meant to provide a stream of income for life to pensioners -- a bit like an annuity payment.
Unlike an annuity, however, the funds have a mandatory minimum annual withdrawal -- like an RIF (retirement income fund) -- and an optional maximum withdrawal rate. Both withdrawal rates change year-to-year, depending on age and other factors.
But it's the maximum withdrawal rates that have presented headaches for many pensioners under the old legislation.
According to the old rules, the annual, maximum withdrawals for LIFs and LRIFs are calculated differently. As a result, the maximum amounts for one could be higher than the other, depending on the year.
The LIF maximum withdrawal rate is based on the annuity factor that corresponds to the long-term bond rate and a person's age.
"Presently, that reference rate is at six per cent," Lyon says. "So, you're essentially, under the life income fund this year, removing between 6.1 per cent to 20 per cent of the balance as the maximum, depending on your age."
The maximum withdrawal rate for the LRIF is based on the return on the invested capital in the fund for the previous year. The return on invested capital is calculated based on the market value of the fund at the beginning of the year minus the market value of the fund at the beginning of the previous year, adjusted by plus or minus the net value of all transfers in and out of the fund, plus withdrawals of income.
And to add one more layer of complexity, owners of these retirement income funds had to switch from one to the other to get the higher maximum annual payment, Lyon says.
But the new LIF will use the greater of the two formulas in any given year, providing the maximum income for those who need it.
That's the background on the transfer. Now let's address St. George's questions with answers provided by retirement planning expert Karen Diamond, a certified financial planner with Diamond Retirement Planning:
St. George's question: "What would be the advantages and disadvantages of transferring 50 per cent of the account balance to a prescribed registered retirement income fund, which is not locked-in, as is seemingly allowable?"
Diamond's answer: "The new Manitoba LIF (and the old LIF and LRIF) have restrictions on annual withdrawals based on the underlying premise the original pension money was intended to deliver an income for life to the annuitant and his/her spouse. That's the 'locking-in' part. But this is very restrictive and does not recognize the fact people may need/want more income in the early years of retirement when they are active and healthy, and less in the later years when they are not as active; neither did it allow for lump-sum withdrawals to address occasional needs. By allowing a one-time transfer of up to 50 per cent of the locked-in money to a non-locked-in plan -- the prescribed RIF (PRIF) -- pensioners are given the increased flexibility they need to create a variable retirement income. The Manitoba PRIF works much like a regular RRIF (registered retirement income fund), but it is still subject to certain pension legislation provisions covering spousal rights, for example. The other 50 per cent in the LIF will still be subject to the maximum annual withdrawal restrictions. In most cases, we are recommending the 50 per cent transfer to a PRIF for flexibility reasons, but personal circumstances will dictate whether or not it is beneficial to the client."
As a side note, Diamond says the changes to pension legislation have also made it a little easier to facilitate the 50 per cent transfer. Now, the transfer can be made directly from the pension plan, provided the pension administrator permits it, instead of first having to transfer the full amount to an LIF and then 50 per cent to the PRIF.
One word of caution regarding the transfer is that the income is now discretionary and a retiree could withdraw too much, too soon from the account, leaving insufficient retirement income later in life, she says. In addition, spouses of pensioners relying on the original expected pension income may not receive as much income. With their spouse transferring the money out of the LIF or LRIF into a PRIF, the survivor must waive his or her right to be eligible for the minimum 60 per cent survivor pension. Still, as beneficiaries of an LIF and/or PRIF, survivors are entitled to the account balance on the passing of their spouse.
St. George's question: "Can you please list for me some registered retirement income funds that are not locked in?"
Diamond's answer: "The PRIF is simply a type of registration of a retirement account governed by pension legislation. Most financial institutions that offer RRSPs and offered the old LIFs and LRIFs will probably offer the PRIF as well. Sometimes it just takes time for them to get organized administratively because the paperwork is onerous."
Diamond says that because of the "onerous paperwork," anyone planning to go ahead with the 50 per cent transfer from an LIF or LRIF to a PRIF should understand the process will take some time to complete.
St. George's question: "I prefer to purchase stocks rather than mutual funds. Is this allowed?"
Diamond's answer: "Any investment that qualifies to be held in a registered account under the Canada Income Tax Act would qualify in a PRIF, provided the fund administrator or institution allows it."