If you leave an employer with a pension plan, you can choose either to receive a monthly pension from the plan when you retire, or to receive a one-time lump sum representing the full value of your pension, including employer contributions. This transfer amount must move to a locked-in RRSP (LIRA). In essence, the LIRA is just an RRSP with some added restrictions because pension funds are designed to ensure that you have lifetime income. Later, once you reach age 50, you will have some options to convert your LIRA into income using a Life Annuity, Life Income Fund (LIF) or a Life Retirement Income Fund (LRIF). In all cases, there are a number of rules and regulations to the amount of income you can get.
In 2003 and 2005, the Government of Alberta issued discussion papers about pension topics to solicit feedback from industry stakeholders and the general public. With the new regulation changes, the government has addressed concerns that the rules are too restrictive and there needs to be greater flexibility and access to funds. One of the concerns was there were too many people dying with too much money in their LIRA accounts. In addition, maximum withdrawals allowed from products such as a LIF were too low, especially for people who retired early and who are not yet receiving benefits from the Canadian Pension Plan or Old-Age Security.
Today, there's great news. The Alberta Government has made some significant changes to the rule when it comes to Pension Funds.
- Effectively immediately, Alberta-regulated Life Retirement Income Funds (LRIFs) can no longer be established. Alberta Life Retirement Income Funds LRIFs can no longer be sold. This is great news as many people were confused about the differences and similarities between LIFs and LRIFs. In this case, simplification should be well received. The regulators have combined all of the advantages of a LRIF with a LIF.
- Additionally, existing Alberta LRIFs must be converted to LIFs by December 31, 2007. Existing LRIFs may be administered as such until they are converted. Right now, there are no details on how this will be carried out but there will be some time before you need to do anything. Take your time to evaluate your choices so you make the right choice.
- Effective immediately, Alberta-regulated LIFs are no longer required to be annuitized at age 80. Again, this is great news giving pensioners more choice and flexibility. Pensioners can still convert their LIFs to an annuity but they can do it when they deem the timing is right.
- In addition, there is a new LIF Maximum withdrawal calculation. It is proposed that new maximums will allow pensioners to draw a higher level of income from their LIFs.
- The government has proposed a one-time 50% unlocking provision for pension funds. Effective November 1, 2006, Alberta clients age 50 and over have a one-time option to unlock up to 50 per cent of their locked-in pension contributions after exiting an eligible pension plan, provided the appropriate spousal waiver is obtained. For those people over the age of 50 in a pension, LIRA, LIF or LRIF, there will be an option to move 50% of the money into an RRSP, RRIF or to take the amount into income. This option must be exercised by December 31, 2007.
The information provided here is only preliminary. Details of administration and paperwork still have to be determined by the government. For now, this is clearly a step in the right direction to give people with pension funds more flexibility to the use of their money. Financial institutions will be receiving information about the regulation changes and can help their eligible clients take advantage of the new unlocking option. Additional information is available on the Alberta Finance website at www.finance.gov.ab.ca/business/pensions.