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By Gigi Suhanic
National Post
FP Weekend Section
Saturday, March 26, 2005
Question: Did the recently passed federal budget waive the requirement that a locked-in LIF had to be transferred into an annuity at age 80?
Answer: Yes, the new federal budget has eliminated the requirement that seniors convert their federally regulated Life Income Funds to a life annuity at age 80.
Adrian Mastracci, investment counsel at Vancouver’s ‘fee-only’ KCM Wealth Management, says, "Any change to simplify and make the LIF easier would be in the best interest of the person who has one, because as an investor you want as much flexibility as you possibly can get.”
"The age requirement ... is no longer there for new contracts," says Alain Desroches, an official with the federal Department of Finance. "There will be no automatic changes to the terms of existing LIF contracts, though parties would be able to remove such terms by mutual consent," Mr. Desroches says. That means it would be possible, at least in the federal government's view, for an individual and LIF provider to agree to change the terms of an already existing contract.
This change hasn't come out of the blue, though. According to Mr. Desroches, seniors groups and the broader Canadian public have been pressing on this issue, seeking more flexibility with their retirement savings, especially given that Canadians are living longer and more active lives.
With an annuity, a sum of money is paid, usually to an insurance company, in exchange for guaranteed amount each month. LIFs, on the other hand, are similar to RRIFs in that a minimum withdrawal must be made each year. But, unlike RRIFs, there is maximum withdrawal amount, as well.
That said, LIFs are desirable because they provide more flexibility than an annuity, according to Adrian Mastracci, investment counsel with KCM Wealth Management in Vancouver.
"You get [some] flexibility on who it goes to when you die; you get flexibility on the investments [within the fund] for the most part; there's a little flexibility on how much you can take out. It's a totally different animal than the annuity. The annuity is fixed. Once you've done it that's it. There's nothing more you can do," Mr. Mastracci says.
According to Mr. Desroches, the minimum for federal LIFs as defined under the Income Tax Act and will stand. (The amount is based on a formula linked to your age.) The Finance Department is in the process of reviewing the maximum amount that can be withdrawn from a locked-in LIF.
However, you shouldn't assume the change will cover all LIFs. Mr. Desroches confirms that it only applies to federally regulated locked-in pensions. So if your pension is provincially regulated, your LIF would be subject to pension regulations established by the province where you worked.
Ottawa is following in the footsteps of other provinces that have already changed their locked-in LIF rules. British Columbia, for example, amended its regulations in April, 2004, to eliminate the annuity requirement. (However, Alberta and Ontario, Newfoundland and Labrador, still require that provincially regulated locked-in LIFs be converted to an annuity at age 80.)
"There was significant public demand," says Michael Peters, deputy superintendent, pensions, with the Financial Institutions Commission of British Columbia. "There was a lot of public opposition to being required to purchase an annuity where any residual would not be available to their heir," Mr. Peters says, referring to the fact that once the people who the annuity was purchased for are deceased, the annuity in gone and generally inheritors won't get anything.
Mr. Peters also noted that as part of the adjustment, British Columbia has simplified the rules guiding the maximum allowable withdrawal, which were "rigid and inflexible."
To recap, you need to establish whether your locked-in LIF is federally or provincially regulated -- and if it's the latter, you will need to investigate the rules for locked-in LIFs, not in the province where you live but where you worked.
"Any change to simplify and make the LIF easier would be in the best interest of the person who has one, because as an investor you want as much flexibility as you possibly can get," Mr. Mastracci says. "If you have the flexibility you can make changes to your situation if, indeed, you need any."
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