First Year of Retirement

In Canada, many employers offer pension or defined contribution plans as part of their benefits. When retiring, you might face the decision of receiving monthly payments or opting to "commute your pension," converting accumulated funds into a lump sum. 

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Understanding Pension Commutation 

Commuting your pension doesn't grant immediate access to the entire accumulated sum. Instead, your pension provider's responsibility shifts to an investment firm that transfers the funds into a Locked-In Retirement Account (LIRA). These funds can later then move to a Life Income Fund (LIF) or Locked Retirement Income Fund (LRIF), enabling withdrawals according to a federally regulated schedule each year.

Key Aspects of Locked-In Plans

These plans are similar to traditional RRIF, in that there is a minimum amount you must withdraw in any given year, according to age. To preserve asset value, they also limit the maximum amount you can draw per year, according to your age. These rules directed by federal and provincial pension plan statutes.

Essential elements are similar across federally administered plans and those managed by Alberta organizations:

  1. Automatic beneficiary designation is typically your spouse.
  2. In the event of death, funds may transfer to a spouse's locked-in plan (Federal plans) or to an RRSP or RRIF (Alberta plans). Upon the second spouse's death, assets pass to named beneficiaries or the estate.
  3. In cases of marriage breakdown, up to 50% of assets might be allocated to the former spouse.
  4. Non-residents may withdraw the balance of locked-in plans after residing abroad for two years with written proof of non-resident status.
  5. Alberta and Federal plans allow a one-time transfer of 50% of the LIRA assets to an RRSP when converting to a LIF or LRIF.

Considerations for Pension Commutation

Deciding to manage your pension funds personally might be driven by a few factors:

  1. Performance: Pension plans often lean toward conservative management. Controlling your commuted value might offer higher growth potential through increased exposure to equity markets, albeit with higher risk due to market volatility.
  2. Portability: Retaining control over your pension assets might be prudent if concerns arise about the financial health of the organization providing pension benefits, as the plan remains with you regardless of location.
  3. Estate Planning: Pension benefits typically end after the second spouse's death. Because LIF / LRIF assets transfer to the estate after the death of the second spouse, pension fund assets may be part of the estate and your legacy.

Evolving Rules and Financial Consultation

Federal and provincial regulations for locked-in plans have become more flexible over the years. Alberta, for instance, introduced unlocking flexibility for financial hardship and increased the LIF maximum age calculation to 90. Consultation with financial advisors about investment strategies, asset allocation, risk tolerance, retirement income needs, and fund drawdown schedules is crucial at this stage. This might prompt a comprehensive review or the creation of a new financial blueprint for retirement.

 

All material has been prepared by McKenzie Wealth. McKenzie Wealth is an investment advisor team or Investment Advisor at Richardson Wealth Limited. The opinions expressed in this blog/ video are the opinions of the author and readers should not assume they reflect the opinions or recommendations of Richardson Wealth or its affiliates. Richardson Wealth Limited, Member Canadian Investor Protection Fund. Richardson Wealth is a trademark of James Richardson & Sons, Limited used under license.