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The Money Management Newsletter: Retirement Income Planning
Converting your RRSP: Choosing a LIF, LRIF or Life Annuity

December 31st each year is the deadline for those who turned 69 during the past 12 months to convert their regular RRSPs to RRIFs . It is also the deadline for those of the same age to convert their locked-in RRSPs to a LIF or LRIF.

You now may be asking, "What are LIFs and LRIFs" ? The answer is simple: a LIF or Life Income Fund is a registered investment vehicle that allows for regular withdrawals from locked-in retirement funds. A LRIF or Locked-in Retirement Income Fund is similar to a LIF except that....

Locked-in RRSPs arise when an individual terminates membership in their employer-sponsored pension plan and elects to transfer their pension funds out of the employer plan and into an RRSP where he/she can control the investment. The locked-in restriction means that the individual cannot withdraw the funds at will, as is the case with a regular RRSP. Withdrawals from a locked-in RRSP are restricted and can only be done through conversion to a LIF, LRIF or Life Annuity. Conversion rules vary by province and locked-in funds that originated from federally regulated pension plans have their own set of rules. Some jurisdictions permit conversion at anytime while others restrict the earliest conversion date to age 54.

The LIF option

If the LIF option is chosen, withdrawal minimums are the same as for RRIFs. LIFs however, have a maximum withdrawal amount whereas with RRIFs the maximum limit does not exist. The maximum LIF withdrawal is based on three factors: the value of the LIF at January 1, the owners age and a federally determined rate known as the CANSIM rate which stands for Canadian Socio-Economic Information Management.

Another major difference between LIFs and RRIFs is that in most provinces LIFs must be converted to a Life Annuity when the owner turns 80. This means turning over the LIF funds to an insurance company, thereby giving up control of the capital and there are some drawbacks to this. The LIF owner whose assets are in mutual funds or stocks and bonds must therefore pay close attention to market conditions as age 80 approaches in order to maximize the plan conversion value and subsequent annuity payments. It is also wise to keep watch to prevent a major market loss to the portfolio as there will be no time left for a recovery.

The Life Annuity option

Converting to a Life Annuity is another option however, concerns remain since this conversion means loss of estate value as the annuity payments will cease upon the death of the owner. Annuities can be purchased joint with a spouse so that the spouse is protected. They can also come with a guarantee of payments to age 90 (with the choice of either spouses age being used), so that if both spouses die prior to the 90th birthday chosen, there will be some estate value. Of course, maximizing estate value is not the original mandate of LIF funds; it is to provide retirement income for the owner and his/her spouse. Life Annuities are based on actuarial principles so for every person who dies young, there is a person who lives to a ripe old age and collects payments far in excess of their LIF value.

The LRIF option

A more flexible option was introduced in Ontario on March 3, 2000 and is known as the LRIF (Locked-in Retirement Income Fund). This option eliminates the requirement to convert the account to an annuity at age 80. Withdrawals can be based on the plans' investment return from the previous year or on the same minimum permitted for RRIFs and LIFs. In Ontario, any unused withdrawal room from one year can be carried forward to future years.

Small locked-in balances

If you are age 55 or older and the total value of all of your locked-in accounts is less than 40 per cent of the years' maximum pensionable earnings (YMPE), you can request to have these locked-in funds transferred to an RRSP or RRIF, thus removing the locked-in status. The YMPE is currently $37,600, so this feature applies only to balances of $15,040 or less.

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