It’s been a while since I was last writing, and most of you will know that our office has gone through some major self-induced changes in the past year, even while being under a work-from-home order half the time. Excuses, excuses, I know. But I’m back to writing now! Hopefully for good. The evolution of our business continues, and I have three major goals for the upcoming year, although they shouldn’t be anything near as disruptive, but personally I think they’re a lot more exciting! More news on that to come.

So how to start off writing again after so long? My biggest inspiration lately is that I’ve had a lot of planning conversations focused on the timeline of retirement planning, noting the specific key dates and ages. I like timelines. I like patterns, and specific action points. Sounds like a great place to start!

Welcome to the Financial Planning Vicennial.

A Vicennial is a twenty-year period of time. Our story begins at age 55, when the accumulation years move into their peak, and serious retirement planning begins.

Our planning topic for age 55 is a review of pension rules.

Pension Rules at 55

While formal pension plans are less and less common, the calendar year in which one turns age 55 is a very important time for pension plan members.

The specific age in which you can take pension income is regulated by each province. In BC and Alberta, that age is actually 50, but in Saskatchewan, Manitoba, and Ontario, you have to be 55.

When retirement planning at age 55, there are two special things to consider in regards to your pensions. The first is that income from formal pensions becomes eligible for the pension income tax credit. The second is that special unlocking rules for commuted pensions come into effect.

Pension Income Tax Credit

One of the benefits of a formal pension is that the income is eligible for a specific tax credit at an earlier age than income from a RRIF.

The calculations for this are pretty straight forward. The first $2,000 per year of qualifying pension comes with a 15% federal tax credit, and a provincial amount that varies by province. BC, SK, and MB credit the first ~$1,000 of qualifying pension income at 5.06%, 10.50% and 10.80% respectively. AB and ON credit the first ~$1,500 at 10.00% and 5.05% respectively. So all together, roughly between 20% and 25% of tax is offset.

Therefore, one of the key retirement planning considerations at age 55 (or 50 for AB & BC), is whether to start your pension income. If you are anticipating a fairly low income, taking pension income early could result in significant tax savings over your lifetime.

Now, pension rules follow pension money in most ways, but unfortunately, pensions that have been commuted are considered under RRSP rules, and therefore income from commuted pensions does not attract the pension income tax credit until age 65.

Special Unlocking rules

But all is not lost! Commuted pensions have their own special arrangements that can make them a worthy alternative.

“Commuting” a pension is what happens when you ask your pension provider to send the money within a pension to your own locked-in RRSP account for you to self-manage. There are lots of reasons why you would do this, but some of the main ones would be:

• The pension company is on shaky financial grounds, and you don’t trust them to provide your income for the next 40-odd years
• You are single, or have a shortened life expectancy, and want to create an estate-able asset in the event of your death
• Many pensions are managed conservatively, so commuting may provide you with an opportunity to achieve higher returns
• Or if you have several smaller pensions under the same jurisdiction, or are eligible for unlocking and would like to consolidate them to make income planning easier.

Two quick things. Sometimes there are age caps on commuting a pension, and the most common one I’ve seen is age 55, so this option may not be available to everyone.

Second, there are two categories of Locked-in Retirement Accounts, specifically a LIRA and an LRSP, and four categories of Life Income Fund, including LIF, RLIF, LRIF, and PRIF, each with different rules and jurisdictional availability. For our purposes, I’ll use the word ‘LIRA’ to reference the locked-in version of an RRSP, and ‘LIF’ to reference a matured LIRA with income requirements.

Back to the main topic.

Once a pension is commuted, there may be an opportunity to “unlock” it, by which we mean to remove the pension rules from the money, turning a LIRA into an RRSP. We would do this because a LIF otherwise can impose some fairly strict maximum income calculations, which may not be consistent with your income goals. Most likely, we’d unlock by rolling the LIRA back into an RRSP structure to avoid any tax consequences, and that can be done without affecting your RRSP contribution room.

There are two key unlocking opportunities to look at if you’re age 55.

Small amounts unlocking is available in BC, AB, SK, MB and ON. In BC, AB, and SK the rule is 20% of the Yearly Maximum Pensionable Earnings, or $12,320 in 2021, and there is no age restriction. Ontario is exactly double this amount, but the funds cannot be unlocked until age 55. In MB there is a special growth formula. At age 55, the small amount benchmark is effectively $13,759.

AB, MB, and Ontario also have a one-time 50% unlocking provision, but you must move the 50% of the LIRA that remains locked-in into a LIF and you can’t open a LIF until age 50 or 55, depending on the jurisdiction.

Interestingly, the 50% unlocking rule can be used in combination with small amounts. So if you unlock half of your LIRA to your RRSP, and the other half that moves to a LIF is now under the small amounts limit, that LIF account can be unlocked back to a RRIF. While a transfer from a LIRA to a LIF is irreversible, a transfer from an RRSP to a RRIF is completely reversible, so you could end up being able to roll the entire LIRA back into an RRSP. If you’re careful about it and do it within the same calendar year, there are no income requirements and therefore no tax consequences.

It’s worthy to note that SK and MB LIFs have no withdrawal maximums, and basically operate the exact same as a RRIF does, so the primary benefit for unlocking is just to consolidate accounts and have one less thing to deal with.

Depending on your jurisdiction, there may also be some opportunity to unlock based on financial hardship, shortened life expectancy, or departure from Canada.

So in summary, there are two major financial planning considerations to make at age 55, both regarding your pension. The first is if you want to take income from your pension, in order to take advantage of the pension income tax credit. The second is if, instead, you’d rather commute your pension to a LIRA before you reach your pension’s commutation age cap, in order to create an estate-able asset and potentially take advantage of unlocking benefits.

Note that for either of these strategies you have to be ‘retired’ from the pension plan.

For more information on planning for pension plans, or if you have questions on which pension option to take, speak to a Registered Financial Planner today.

Meagan S. Balaneski, CFP, R.F.P, CLU, CIM

Portfolio Manager

Aligned Capital Partners

The opinions expressed are those of Meagan S. Balaneski, and may not necessarily reflect the views of Aligned Capital Partners

Meagan S. Balaneski can be reached at mbalaneski@alignedcp.com