If you belong to an employer-sponsored defined-benefit (DB) or defined-contribution (DC) registered pension plan, your savings are locked in by law until retirement.
If yours is a DB plan, on retirement you will be entitled to an annual pension based on the plan formula, your income at retirement and your years of service. You can retire up to 10 years earlier than the plan’s normal retirement date (i.e., as early as age 55), but your benefits will typically be reduced if you start collecting your pension prematurely.
If you have transferred pension money from a previous employer’s plan to a locked-in retirement account (LIRA) or locked-in RRSP, it must be converted to a retirement income option such as a life income fund (LIF) or locked-in retirement income fund (LRIF) by December 31 of the year in which you turn 71.
You must begin withdrawing funds from your LIF or LRIF in the year after you set it up. There are minimum and maximum permissible withdrawals from the plan each year.
The minimum is imposed by the Canada Revenue Agency to ensure your tax-sheltered savings are converted into taxable income beginning at age 72. Maximum annual withdrawal limits are established by pension standards legislation to ensure your money lasts long enough to help support you in your retirement.
What if I need the money from my pension before I retire?
Depending on which provincial or federal pension statute governs your plan, all or part of your pension benefits may be unlocked under specific circumstances:
- You become a non-resident of Canada.
- A doctor certifies that you have a shortened life expectancy.
- You encounter financial hardship.
- Your benefit is smaller than a threshold established by legislation.
Saskatchewan is the only province that allows your full DB or DC pension account to be unlocked at your early retirement date and transferred to a registered retirement income fund (RRIF).
Other jurisdictions such as Alberta, Ontario, Manitoba and the federal pension regulator allow special, time-limited transfers of up to 50% of the value of your benefits from your pension plan to a RRIF.
Individual and group registered retirement savings plans (RRSPs) and RRIFs are not locked in, so at retirement your money can either remain in the account or be transferred into another RRSP or a RRIF. However, all RRSP funds must be transferred to a RRIF on the same schedule as the locked-in accounts described above.
Since RRIFs are regulated only by income tax law and not pension law, when you convert your RRSP into a RRIF, there are minimum annual withdrawals but no maximums.
Until recently, most Canadian pension jurisdictions did not permit DC plans to pay members benefits directly from the plan. However, now provinces such as Alberta, British Columbia, Manitoba and Saskatchewan allow pension plans with a DC provision to offer members the option of having account balances allocated to a variable benefit account from which benefits, mirroring those currently permitted from a LIF, can be paid on retirement. Ontario is currently consulting on a similar regulatory change.
The advantage to members of permitting DC plans to pay variable benefits is that their savings can remain invested in familiar funds offered by their pension provider with expert management and lower administrative expenses than retail products. However, even in provinces where the necessary regulatory changes have been made, few employers have embraced this option yet.
Therefore, in most cases at retirement you will have the following transfer options for the locked-in balance in your DC account. Terminology varies depending on which pension benefits statute applies:
- Another registered pension plan
- A locked-in retirement account (LIRA) or locked-in RRSP
- A life income fund (LIF) or locked-in retirement income fund (LRIF)
- An annuity purchase
Consult your financial advisor to ensure that you draw down your funds in the most tax-effective way possible. An advisor can also help you reduce the effect of your withdrawal plan on your eligibility for government benefits such as Old Age Security and the Guaranteed Income Supplement.