Dealing With Early Retirement

Companies from various sectors are committed to cutting costs to remain globally competitive. Economic pressures are affecting all levels of government, as well as medical and educational institutions. The result? Many Canadians are facing permanent lay-off, voluntary early retirement or forced early retirement.

Individuals who still have a long way to go before they retire will be focusing on finding new employment. Others who were already planning to retire in the not-so-distant future might accept this as an earlier beginning to life after work. If this second scenario applies to you, you have some important decisions to make.

Pension Plan Options

Another matter you'll need to address is your company pension plan. Regardless of whether you have a defined contribution or defined benefit plan, you generally have two options upon termination. You can remain with the plan and receive a pension at retirement, or you can have the funds transferred to a locked-in RRSP plan.

If you do have the choice, there are several factors you should consider. After all, both options have their merits.

By staying with the plan, among other benefits, you'll be guaranteed a lifetime income and need not worry about the management of the funds. The company will take care of that. You may also be able to arrange a lifetime survivor benefit for your spouse, obtain inflation protection, and have the option to delay receiving your pension past age 65.

By transferring the funds to a locked-in plan, you also have the ability to postpone receiving your retirement funds beyond age 65. Furthermore, you'll be able to control the management of the funds and select investments that best reflect your needs. And, upon your death, your spouse can roll the entire value of the locked-in plan to his/her own RRSP or locked-in plan depending on pension legislation. Transferring the funds to a locked-in plan also provides greater flexibility for tax and estate-planning purposes. However, by opting out of the pension plan, you may forfeit other group benefits such as dental, health and life insurance coverage.

Now if you do choose the transfer option, you'll face another decision. Which locked-in plan should you select? The answer to this will directly depend on your income needs.

If you find that you don't need the income just yet, then you must park those funds in a LIRA (Locked-in Retirement Account) or locked in RRSP. The money will continue to grow tax-free until you need it or until you turn 71.

If you require income from a pension plan and you meet the requirements consider choosing one of the approved income vehicles. Income vehicles include a Life Income Fund (LIF), a Prescribed RRIF or a Locked-in Retirement Income Fund (LRIF). Check your pension legislation to determine the appropriate type.

Locked-in Retirement Account (LIRA)

If you're facing early retirement, you may have the option of transferring your accumulated company pension plan funds into a locked-in plan. However, depending on your circumstances, you may determine that you don't need to draw on that income right away.

Perhaps you have another source of income from other employment, investments or rental property. Or maybe your spouse is still working and earning enough to provide for both of you. Whatever the reason, you are allowed to postpone using those funds. You can transfer them to a Locked-in Retirement Account (LIRA).

A LIRA is basically an RRSP that is subject to restrictions under provincial or federal pension legislation. Funds transferred to a LIRA are allowed to grow tax-free until age 71. At that point, the plan matures and funds must be used to purchase an annuity, or be rolled to a Life Income Fund (LIF) or a Locked-in Retirement Income Fund (LRIF) if legislation permits.

The major difference between an RRSP and a LIRA is that you are generally not allowed to withdraw any funds from a LIRA. To make withdrawals, the funds must first be transferred to an annuity, LIF or LRIF, once any minimum age requirement is met.

Life Income Fund (LIF)*

If you're facing early retirement, you may have the option of transferring your accumulated company pension plan funds into a locked-in plan. And, if you need to start drawing from those funds right away and you have met any minimum age requirements, you'll need to choose an income vehicle. One option, if allowed, is a Life Income Fund (LIF).

LIFs are very similar to RRIFs (Registered Retirement Income Funds) in that they allow you to retain control over how your retirement funds are invested. As with a RRIF, there is an annual minimum that you must withdraw but unlike a RRIF, there is also an annual maximum.

This maximum is in place to ensure you don't deplete the funds too quickly. You should also note that, in some cases, any funds remaining in a LIF must be transferred to an annuity at age 80.

Locked-in Retirement Income Fund (LRIF)*

If you're facing early retirement, you may have the option of transferring your accumulated company pension plan funds into a locked-in plan. And, if you need to start drawing from those funds right away and you have met any minimum age requirements, you'll need to choose an income vehicle. Generally, you have a choice between a LIF or an annuity. However, for pension plans regulated by Ontario, Newfoundland and Manitoba only, there is an additional option: a Locked-in Retirement Income Fund (LRIF).

LRIFs are similar to LIFs in that they allow you to retain control over how your retirement funds are invested.

As with LIFs, there is a minimum and maximum annual payout; however, the maximum formula is based on the plan's investment earnings.

Prescribed RRIF

If you are facing early retirement, you may have the option of transferring your accumulated company pension plan funds into a locked-in plan. Prescribed RRIFs are similar to LIFs in that they allow you to retain control over how your retirement funds are invested. Prescribed RRIFs allow you to retain control over how your retirement funds are invested. With Prescribed RRIFs, there is a minimum annual payout but no maximum annual payout.

Prescribed RRIFs are available in Saskatchewan and Manitoba.*

* Manitoba allows a prescribed, once per lifetime, transfer of up to 50% from a Manitoba regulated LIF or LRIF (not from a LIRA or a pension plan) to a qualifying PRIF. Given the one-time transfer limitation (not one-time per LIF or LRIF), planning is required in cases of multiple LIFs and LRIFs and professional advice is recommended.

The information contained herein is considered accurate at the time of posting. CIBC, CIBC World Markets Inc. and CIBC Investor Services Inc. reserve the right to change any of it without prior notice. It is for general information purposes only. Clients are advised to seek advice regarding their particular circumstances from their personal tax advisors.

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