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Unlocking locked-in funds

Individuals with pension savings often transfer these assets to a locked-in plan, such as a Life Income Fund (LIF), to provide retirement income. While a LIF provides a certain degree of flexibility, the annual minimum and maximum withdrawal limits can restrict retirement income planning. If you are looking for additional retirement income flexibility, making full use of the maximum withdrawal limits can allow you to unlock some of these locked-in funds without losing the benefit of tax-sheltered investment growth.1

An in-depth look at the issue ... and the opportunities

Because LIFs hold pension assets, they are subject to pension legislation. Pension legislation imposes an annual maximum amount that can be withdrawn from a LIF. If the maximum amount is not withdrawn from a locked-in plan in a given year, it continues to be locked in, even though the individual had an opportunity to withdraw it. Remember too, that any growth or investment earnings that might derive from that amount also remain locked in.

If you have no immediate need for the funds, any withdrawal above the minimum amount each year can be transferred directly to a regular Registered Retirement Savings Plan (RRSP) for those 71 or younger, or to a Registered Retirement Income Fund (RRIF). This does not affect RRSP contribution room and there is no withholding tax.

The advantage? You are able to unlock a portion of your locked-in savings without losing the benefit of tax-sheltered investment growth, and gain future flexibility in retirement income planning because the transferred funds are no longer restricted by maximum withdrawal limits.

Don’t need the income?

You may still want to consider an unlocking strategy as early as possible. The minimum payment you have to take into income can be used to make your annual RRSP or TFSA contribution.

Funds currently in a Locked-in Retirement Account (LIRA) can be transferred to a locked-in plan such as a LIF as soon as pension legislation allows, which varies by province. Following this course of action means individuals will need to begin annual withdrawals earlier than they might have planned – but they benefit by the unlocking occurring earlier.

Other options for unlocking funds

Some pension jurisdictions have introduced a limited one-time opportunity to transfer a portion of a LIF to a regular RRSP, for those 71 or younger, or to a RRIF. This means individuals may be able to unlock up to 50 per cent of their locked-in savings without losing the benefit of tax-sheltered investment growth.

John Natale, LL.B., BComm, EPC, CFP

Head of Tax, Retirement & Estate Planning Services.

John is the Head of the Tax, Retirement & Estate Planning Services, Wealth team at Manulife. He and his team provide case-level support on tax, retirement, and estate planning matters to advisors across the country.

Some provinces offer a prescribed RRIF (PRIF) that can be used for funds transferred from a pension plan or from a LIF. In a PRIF, the funds remain subject to the applicable pension legislation but there is no maximum annual payment. The investments in a PRIF continue to benefit from tax-sheltered investment growth.

Ideal candidates

An unlocking strategy for pension savings is worth considering for those who:

  • Are relying or plan to rely primarily on pension funds as their main source of retirement income
  • Are looking for more flexibility in terms of access to their retirement savings
  • Anticipate needing less than the maximum amount from their LIF over the next several years

  • If you have clients who could benefit from this information, send them a copy of our easy-to-read piece (MK1394), available here

    For LIFs in British Columbia, Alberta, Manitoba, Ontario, and Newfoundland and Labrador, the maximum payment is the greater of the factor based on the individual’s age and the factor based on the previous year’s investment returns. Many individuals experienced very strong returns in 2019, resulting in significant increases in their maximum payments. In some cases, maximums more than doubled. This presents a great opportunity to unlock funds.

    Source: Manulife Investment Management, Bloomberg.

    Making it work

    Richard is a 55-year-old investor in Ontario who transfers a $250,000 LIRA to a LIF.

    In the first year he can unlock the full amount (i.e., the maximum payment) allowed since there is no minimum. In the second year, at age 56:

  • The LIF maximum is 6.57 per cent
  • The LIF minimum is 2.94 per cent
  • The difference is 3.63 per cent, so the amount that can be unlocked is $9,075 (3.63% of $250,000)

  • Assuming the funds earn an annual return of five per cent, Richard can transfer $81,000 to an RRSP or RRIF over a 10-year period. And since Richard also unlocks the future investment earnings on any amount transferred, the total amount unlocked over the 10-year period becomes $103,000. If a younger spouse’s age was used to calculate the RRIF minimum, more funds could become unlocked each year.

    The unlocked funds can provide significant opportunities – providing the financial flexibility to meet changing financial needs during retirement, or for an emergency situation should it arise.



    Copyright Manulife


    © 2020 Manulife. As one of Canada’s largest integrated financial services providers, Manulife offers a variety of products and services including insurance, living benefits, segregated fund contracts, mutual funds, annuities and guaranteed interest contracts. The persons and situations depicted are fictional and their resemblance to anyone living or dead is purely coincidental. This media is for information purposes only and is not intended to provide specific financial, tax, legal, accounting or other advice and should not be relied upon in that regard. Many of the issues discussed will vary by province. Individuals should seek the advice of professionals to ensure that any action taken with respect to this information is appropriate to their specific situation. E & O E. Manulife Mutual Funds and Manulife Exchange‑Traded Funds (ETFs) are managed by Manulife Investment Management (formerly named Manulife Asset Management Limited). Manulife Investment Management is a trade name of Manulife Investment Management Limited. A division of Manulife Asset Management Limited. Commissions, trailing commissions, management fees and expenses all may be associated with investments in the Manulife Mutual Funds and Manulife ETFs. Please read the ETF facts/fund facts as well as the prospectus before investing. The Manulife Mutual Funds and Manulife ETFs are not guaranteed, their values change frequently and past performance may not be repeated. Any amount that is allocated to a segregated fund is invested at the risk of the contractholder and may increase or decrease in value. Manulife, Manulife & Stylized M Design, and Stylized M Design are trademarks of The Manufacturers Life Insurance Company and are used by it, and by its affiliates under license.

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