An array of registered retirement investment vehicles approved by the Canadian and provincial governments await those who will be retiring with defined contribution plan assets, but those retirees will need to get up to speed on what each investment option does.
According to the Association of Canadian Pension Management, Toronto, the four options retirees can choose for their defined contribution retirement assets at age 65 are:
- individual life income funds or registered retirement income funds;
- group LIFs/RRIFs;
- annuities; and
- direct DC variable withdrawals.
Life income and registered retirement income funds are the most common choice for DC retirees, according to the ACPM report, “Decumulation, The Next Critical Frontier: Improvements for Defined Contribution and Capital Accumulation Plans,” released March 27. Assets in both the LIF and RRIF are taxed upon withdrawal.
LIFs are locked-in retirement funds, meaning retirees cannot take lump sums from them but instead can take set withdrawals based on federal and provincial limits. RRIFs do not need to exclusively contain assets from a retirement fund and can include assets from individual retirement accounts like registered retirement savings plans. For both funds, retirees at age 71 are required to withdraw a percentage of assets from the plan, with the percentage increasing annually as the retiree gets older.
Individual LIFs and RRIFs can be obtained from insurance companies and financial services firms like banks.
Payouts from RRIFs and LIFs are based on minimum requirements set by the federal government with maximums set by each province, said Idan Shlesinger, Toronto-based senior partner in Morneau Shepell Ltd.'s retirement pension consulting practice and managing partner of Morneau Shepell's capital accumulation plans services practice.
“We see two main approaches to employer-sponsored decumulation,” Mr. Shlesinger said. “The first, and simplest, is to allow for variable payments directly out of a DC plan. The payments are subject to very similar rules as would apply to LIFs, and subject to provincial pension regulation. This can be a simple and seamless process for the plan member, and investments offered can be very similar, or even identical to those in accumulation. The two main weaknesses of this approach are: one, not all provinces permit these payments out of the pension plan, and two, this approach can only accommodate pension money — not registered retirement savings plans (Canadian personal retirement accounts) which are also very popular vehicles.”
The alternate approach, Mr. Shlesinger said, is to register a separate group LIF and/or group RRIF. “The advantage here is that you do not have to deal with jurisdictional issues, and can accept pension and RRSP money. However, the experience is slightly less seamless for members as they must first transfer their money to this vehicle before making income withdrawals – this transfer can be very simple and streamlined, but it is still an extra step. Also, group LIFs and RRIFs must comply with RRSP investment rules which are slightly more restrictive than pension rules.”