Consolidating Retirement Accounts - Registered Pension Plans
We’ve already discussed what your options are to consolidate an employer RRSP plan - but what if your employer offered a Defined Contribution (typically listed as a % of your salary being contributed annually), or Defined Benefit Pension Plan (you are provided with a formula to calculate your pension amount on retirement)? Since Registered Pension Plans are governed by Pension Standards Legislation (which varies province to province) making changes to these plans is typically more difficult than an RRSP plan.
Some things which will determine whether you can, or should, move a pension plan will include whether you are an active employee, what type of pension plan you have, and if you meet any special provisions. I highly recommend speaking with a Financial Planner about your pension plan and the options available to you. Please note this speaks to pension plans governed in Alberta - if you are in a different jurisdiction or under a federal pension plan you may have different provisions. Be sure to mention your pension plan jurisdiction when discussing your pension plan with your financial advisor.
Are you currently employed by a company with an RPP?
If you have a Registered Pension Plan, and you are an active employee, you will be unable to transfer your assets to another plan - they must remain with your employer’s plan. While you may wish to have all your accounts consolidated under one roof, this is not a bad thing. Pension plans do have a required employer contribution on your behalf - so while you are employed you are automatically having some amount contributed on your behalf (essentially free money) that will come with you when you either retire or leave your employer.
You’ve left your employer and you had a Defined Benefit Pension
While you can take your pension, you may not want to. When you leave and receive your statement of options from the plan provider, one option listed is to leave it alone, and collect your defined benefit pension at retirement. Depending on your salary level and number of years with the company, this could be a substantial amount, and is guaranteed to pay for your lifetime. The amount payable at your retirement age (as well as any reductions for early retirement) should be made available to you in your exit package from the provider.
Another option is to take the Commuted Value of the pension, essentially a lump sum that the carrier had designated as the amount that would be used
to fund your pension at retirement. This is usually offered in a LIRA or LIF account (Locked In Retirement Account or Lifetime Income Fund) depending on if you want to be receiving income or letting the funds continue to be invested without touching it. If you had a defined benefit pension, you will want to speak with your financial professional to determine whether the future benefit or the commuted value makes the most sense for you.
You’ve left your employer and you had a Defined Contribution Pension
If you have a Defined Contribution Pension Plan, you will be able to move your account, typically as a LIRA. A LIRA is similar to an RRSP account, except that you cannot make any further contributions to it and you cannot withdraw from it until retirement age (like all investment options, some exceptions apply). Generally, you won’t be able to transfer a LIRA to a Group RRSP plan, however in some instances you can transfer it to another pension plan - you would need to speak with the plan administrator to confirm whether this is possible. If you know you are moving from one employer to another that both have pension plans, you can inquire in advance about transferring the pension directly which will be much easier than moving into a LIRA and back out. In most cases, if you had a pension plan, your likely course of action is to transfer the account to a personally owned LIRA account, or in some cases of a defined benefit plan, to leave the funds and collect your pension at retirement.
What if I was only with my employer a short time?
If you have a small balance in your pension, you may be allowed to unlock the funds. In this case, you can choose to take the funds as cash, which will be subject to withholding tax at the time the funds are paid out, and fully subject to income tax in the year of the withdrawal; or you could transfer it into an RRSP in which case there is no tax impact, and could be combined with your other RRSP accounts. The amount that can be unlocked in Alberta is 20% of the Yearly Maximum Pensionable Earnings (YMPE) if you are under age 65, or 40% of the YMPE if you are over age 65[1]. For 2020, that amount is $11,740 and $23,480 respectively[2]. If your pension amount is over this limit (even by a dollar) you are ineligible to unlock your pension based on it being a small amount.
Are there any other exceptions?
Yes, there are definitely reasons that you can unlock your funds early - however you should be aware that any withdrawal that is not transferred into another registered account, such as an RRSP or RRIF (Registered Retirement Income Fund), will be subject to withholding tax by the institution. Say you withdraw $5,000 in Alberta, you are subject to 10% withholding tax[3] so you will receive $4,500, and the full $5,000 will be fully taxable as income received in the year of the withdrawal. If your marginal tax rate is higher than your withholding tax rate you will owe additional money at tax time. That contribution room will also be lost, so the opportunity cost of tax-free compounding should be considered if there are other options rather than unlocking this money.
Some reasons that will allow you to unlock your pension early include[4]:
Becoming a non-resident of Canada (as determined by the CRA, also indicating your non-resident status for social programs and taxes). Your pension partner will also need to waive their rights to their survivor’s pension.
Considerably shortened lifespan (a terminal illness or disability that leads to considerably shortened life span, as verified by a letter from your doctor is required). The letter does not need to explain the nature of the illness, just to verify the shortened lifespan. If you have a pension partner, they will also need to waive their rights to their survivor’s pension.
Transfer to a LIF at age 50 (may unlock 50% of your pension value). If you are over age 50 you may transfer up to 50% of your pension value into a LIF to begin receiving immediate income (taxable) subject to the minimum and maximum withdrawal amounts in force. This is a one-time election - so if at age 50 you transfer 30% of your pension into a LIF, you cannot transfer an additional 20% at age 55. If, however, after transferring the pension to a LIF, the amount remaining in the LIRA is lower than the small amount unlocking threshold, you may unlock the balance of the pension under that basis. Your pension partner will need to waive their rights to their survivor’s pension for the 50% unlocking (not necessary for small amount unlocking as it has been determined the amount is insufficient to provide a pension income).
Financial Hardship. If you have a low income (below $38,267 in 2019), you or your pension partner have received a letter threatening foreclosure on a debt secured by your primary residence, you or your pension partner are being evicted from your main home due to rent arrears, you or your pension partner need the first month’s rent and a security deposit to be able to move into a new home, or you, your pension partner, or dependents have medical costs or renovations that are not covered by a medical expense plan or any other source in the past or next twelve months, you are eligible to unlock some of your pension funds (typically enough to be able to cover the needed expense).
What should I consider when determining where to open my LIRA?
Much like consolidating your RRSPs, you will want to ensure a healthy balance between low fees, a good selection of funds that make sense for you as an investor, and helpful advice from a trusted advisor. Your personal needs will determine the balance of these three criteria, but all should be considered in the decision-making process.
What do I do with my LIRA when I want to start withdrawing income?
You’ve been working, saving, and investing for years and now you want to start thinking about retirement. You have a LIRA account from a previous pension plan, but as per its name, it is Locked In. So how do we unlock it? We have touched on some of the options above to be able to unlock some or all of the funds, and be able to transfer into an RRSP or RRIF account, but at retirement age, the following options also exist[5]:
Transfer to a LIF. Much like you will transfer your RRSP to a RRIF on retirement to begin receiving funds, you can transfer your LIRA to a Lifetime Income Account, in which the funds within the account will continue to be invested, but each year there will be a minimum withdrawal amount, based on your age. Since this account is also designed to provide pension income for your lifetime, there is also a maximum withdrawal amount based on your age (unlike the RRIF account which has a minimum only).
Purchase a lifetime annuity. This is a product available from an insurance company. You can use the lump sum of money within your LIRA to purchase an income stream from the insurance company. The
most common type will pay a certain amount until either you or your pension partner die, then reduce the benefit to 60% of the initial payment and continue paying for the remainder of the second partner’s life. This can be adjusted depending on which contract type you purchase, but anything less than a 60% joint and survivor benefit must have a waiver signature from your pension partner.
Once the income is unlocked, you can use it for everyday expenses, or to continue investing in other accounts (such as a TFSA) if the income is not needed.
If you’ve left an employer and aren’t sure how to proceed it can help to have your options mapped out for you - contact me here to discuss which options make sense for you.
Elyce Harris is a CFA Charterholder working with Cornerstone Investment Counsel, a registered ICPM in Alberta, Canada. She is also a licensed insurance broker in Alberta, Ontario, and PEI. While every effort is made to ensure the accuracy of statements, errors may occur. If a specific stat or carrier policy is cited, a source will be provided, however this is not done for generalizations
[1] Employment Pension Plans Act
[2] Government of Canada “MP, DB, RRSP, DPSP, and TFSA Limits and the YMPE” https://www.canada.ca/en/revenue-agency/services/tax/registered-plans-administrators/pspa/mp-rrsp-dpsp-tfsa-limits-ympe.html
[3] Government of Canada “Withholding rates for lump-sum payments” https://www.canada.ca/en/revenue-agency/services/tax/businesses/topics/payroll/payroll-deductions-contributions/special-payments/lump-payments/withholding-rates-lump-payments.html
[4] Alberta Government “Accessing Pension Funds” https://open.alberta.ca/dataset/3e08374c-ba38-4b96-abf0-6fd15dae7109/resource/510a93fa-8a48-4ecf-a253-b79339cd3c54/download/accessing-pension-funds-2019.pdf
[5] Alberta Government “Accessing Pension Funds” https://open.alberta.ca/dataset/3e08374c-ba38-4b96-abf0-6fd15dae7109/resource/510a93fa-8a48-4ecf-a253-b79339cd3c54/download/accessing-pension-funds-2019.pdf