Question

Scott and Andrea are meeting with their Financial Planner today to discuss the maturity of Andrea's LRSP. Andrea is turning 71 in October of this year and Scott is turning 68 in December of this year. They both have pensions from their employers and these combined with the government benefits are more than sufficient to maintain their lifestyle. They do not have any other savings beyond their pensions and the LRSP. You are the Financial Planner meeting with the couple and you will need to answer the following questions that they have

Explain the options for the maturing LRSP What option would you recommend? Why?

Explain how the withdrawals work and the options that they have? What would you recommend?

What can they do with the money that they withdraw from the plan?

Answer 1

Options for maturing LRSP are as follows-

Conversion to a life pension-
For the purposes of the purchase of an immediate or deferred life annuity
referred to in paragraph 14 of this Addendum,
a. Where a pension benefit credit transferred into the LRSP was not varied
according to the sex of the plan member, an immediate or deferred
life annuity purchased by the funds accumulated in the LRSP shall not
differentiate as to sex, and
b. A pension benefit transferred into the LRSP will be deemed to have been
determined in a manner that did not differentiate on the basis of the sex of
the beneficiary, unless the Applicant furnishes the Trustee with information
to the contrary.
Withdrawals from the LRSP – Shortened life expectancy
The funds in the LRSP may be paid to the Applicant in a lump sum, if a
physician certifies that, owing to mental or physical disability, the life
expectancy of the Applicant is likely to be shortened considerably, and the
Applicant provides the Trustee with such certification.
Withdrawals from the LRSP – Small accounts
In the calendar year in which the Applicant reaches 55 years of age or in any
subsequent calendar year, the funds may be paid to the Applicant in a lump
sum if:
a. the Applicant certifies that the total value of all assets in all LRSP s, LIFs,
RLSPs, and RLIFs that were created as a result of the transfer of Pension
Benefit Credits under section 26 of the PBSA, a transfer authorized by the
PBSA Regulations, and
b. where the LIF is derived directly or indirectly from a pension plan, the
Applicant gives a copy of Form 2 and Form 3 of Schedule V of the PBSA
Regulations to the Trustee.
Withdrawals from the LRSP – Financial hardship
The Applicant may withdraw an amount up to the “Maximum Financial
Hardship Amount” if:
a. the Applicant certifies that the Applicant has not made a withdrawal in the
calendar year from any LRSP, LIF, RLSP, or RLIF under the Financial Hardship
Provisions, other than within the last 30 days before this certification,
b. in the event that the value of “M” in the definition of the Maximum Financial
Hardship Amount is greater than zero,
i. the Applicant certifies that the Applicant expects to make expenditures
on medical or disability-related treatment or adaptive technology for the
calendar year in excess of 20% of the Applicant’s total expected income
for that calendar year determined in accordance with the Income Tax Act,
excluding withdrawals in the calendar year from any LRSP, LIF, RLSP, or
RLIF under the Financial Hardship Provisions, and
ii. a physician certifies that such medical or disability-related treatment or
adaptive technology is required, and
c. where the LRSP is derived directly or indirectly from a pension plan, the
Applicant gives a copy of Form 1 and Form 2 of Schedule V of the PBSA
Regulations to the Trustee.
Withdrawals from the LRSP – Non-residency
The holder of the LRSP who has ceased to be a non-resident of Canada for at
least two years may withdraw any amount from the plan.
Withdrawals from the LRSP – Marriage breakdown
In accordance with subsection 25(4) of the PBSA Act, the Applicant may assign
all or part of the LRSP to the Applicant’s Spouse, former Spouse, Common-law
Partner or former Common-Law Partner, effective as of divorce, annulment,
separation, or breakdown of the common-law partnership, as the case may be.
Death of Applicant – Survivor benefits
On the death of the Applicant and upon the receipt by the Trustee of any
documentation that may reasonably be required, the funds in the LRSP shall be
paid as follows:
a. to the Survivor of the Applicant, by:
i. transferring the LRSP assets to another LRSP subject to the same
Applicable Pension Legislation,
ii. transferring the LRSP assets to a pension plan including, any pension
plan referred to in subsection 26(5) of the PBSA, if the plan permits such
a transfer and administers the benefit attributed to the transferred assets
as if the benefit were that of a plan member with 2 years of membership
in the plan,
iii. using the LRSP assets to purchase an immediate life annuity or deferred
life annuity, or
iv. transferring the LRSP assets to a LIF or RLIF subject to the same
Applicable Pension Legislation; or
b. If the Applicant appointed a beneficiary and there is no Survivor, transferring
the LRSP assets to the Applicant’s beneficiary; or
c. if the Applicant did not designate a beneficiary and there is no Survivor,
transferring the LRSP assets to the Applicant’s estate.
Amending the Addendum
This Addendum is subject to all applicable legislation, as may be amended from
time to time, which will prevail over any inconsistent or conflicting provisions in
the Addendum.
Other
No money that is not locked in under the Applicable Pension Legislation will be
transferred to or held under this LRSP.

Recommended way would be

The RRIF option is the most popular because he’ll have the flexibility to choose his investments.

If he doesn’t need the income right now, let his RRSP grow on a tax-deferred basis. However, there are required annual minimum withdrawals that will vary from 7.38% of his portfolio’s value at age 71 to 20% at age 94. To beat this, he can use the age of his younger spouse or common-law partner (if he has one). Which is a case we can see here for Andrea. Further,

If he needs the income, he can convert his RRSP into a RRIF before December 31st of the year he turns 71 which will be for Andrea. The required annual minimum withdrawals will be calculated using a percentage known as the prescribed factor, which is 1/(90-age). For Scott, he is over 65, he may be eligible to split up to 50% of his RRIF income with his spouse and hopefully cut his tax bill in half.

When choosing RRIF investments, they must make sure the payout ratio—his desired annual income over his total portfolio’s value—is sustainable in the long term. A realistic ratio will be around 4.5 to 6, depending on age and the investment vehicle used. Otherwise, the portfolio will shrink with every withdrawal and he could run out of money earlier than expected.

Now with the money they have they may choose either of the following

• Convert the plan to a Registered Retirement Income Fund , which provides retirement income annually, semiannually or quarterly (depending on the frequency y choosen). Just like an RRSP, you can hold the same qualified investment in your RRIF, and any investment gains are tax-deferred. Once they convert to a RRIF, they can no longer contribute funds, their spouse can no longer contribute to your spousal RRSP, and you must withdraw a minimum amount every year that is part of the taxable income.
• An Annuity (not available through RBC Direct Investing) is a contract where they pay a lump sum to an insurance company in exchange for steady, guaranteed income for a fixed period of time. Payments are predictable and taxed as regular income. Depending on the type of annuity and any guarantee option selected, the survivor or beneficiary may continue to receive income or a payout if you die prematurely. However, once they purchase an annuity, the funds are no longer available.
• One can “cash out” your RRSP and take the full value of the plan as a lump sum, which is taxable as income in the year you receive the payment.

If they have a Spousal RRSP , they can convert it to a Spousal RRIF. Like regular RRIFs, Spousal RRIFs also require a minimum withdrawal every year and do not permit contributions. However, they should take note of the income attribution rules: even after conversion, if the contributor spouse has contributed to any spousal RRSP in the year or in the prior two years, income may be attributed to the contributor spouse for RRIF withdrawals that exceed the minimum withdrawal for the year.