What can I do with the money in my locked-in retirement account?

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By Julie Cazzin with Allan Norman

Q: I am a retiree and have a question regarding a federally regulated locked-in retirement account (LIRA). Do I have to convert it to a restricted life income fund (RLIF) account in order to transfer a portion of the funds to my registered retirement savings plan (RRSP)? If so, can I then still purchase a life annuity with the remaining funds in the RLIF? I would prefer the annuity over the RLIF minimum/maximum yearly withdrawal restrictions. — Peter

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FP Answers: The short answer to your question, Peter, is yes. You must convert your federal LIRA to a RLIF before you can unlock 50 per cent of its value and transfer 50 per cent to an RRSP or registered retirement income fund (RRIF). And, yes, you can purchase an annuity in your RLIF. But I’m curious about your preference for an annuity and your reasons for this preference.

You are right that using the funds in your RLIF to purchase an annuity avoids the minimum and maximum withdrawal rules since you will receive what the annuity pays. There are some notable downsides to an annuity and many people don’t like them for several reasons, including that they are long-term commitments, your money is locked up, your money is gone once you die and the insurance company wins and pockets your money if you die early.

Inflation is also an issue with annuities. That’s because if you have another 20 or 30 years to live, what is going to happen to your purchasing power?

Now, let’s look at what your rationale may likely be for not putting your money into equities, where you will probably do a lot better. I bet it’s that word “probably,” isn’t it? After all, there is no guarantee that equities will give you better returns and a lot of people don’t like uncertainty.

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What if I told you that without a pension or an annuity, you would need to save twice as much money to have the same income? That’s the conclusion arrived at by recent research by the Retirement Income Institute.

Let’s think about why that would be. Peter, as a retiree, I am guessing you want to maintain your lifestyle over your lifetime at a minimum. The challenges facing you are that you don’t know how long you will live, what your investment rate of return will be or the amount of your unforeseen expenses. With a large investment portfolio, how are you going to deal with those challenges?

I will tell you what some risk-averse retirees do. They alter their spending, effectively locking in their investments so they are no longer liquid. If stock markets drop or there is a recession, they draw less from their investment portfolios.

They become reluctant to spend until they are 75 or 80, when they realize (too late) that they could have been spending more when they were younger. Some people want to amass more wealth than is needed so that they feel comfortable spending less than their wealth permits.

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Now, let’s look at an annuity and how it removes the fear of outliving your money and gives you a licence to spend and spend earlier in retirement.

Think of your retired friends with a good pension. Each month, money comes into their bank account and they are free to spend it all because it will be there again next month. Their spending habits don’t change when stock markets drop, and the sales that come during recessions become shopping opportunities to enhance their lifestyle. A recession may be good for people with good pensions.

I have two sisters, both teachers with good pensions, and they contributed a lot of money to those pensions throughout their careers. Is that so different than contributing to a RRSP throughout your career and then having the option to purchase a pension in the form of an annuity?

Most people choose not to purchase an annuity and prefer to manage their money on their own or with professional assistance. Economists refer to this as the “annuity puzzle.” Why, after understanding the benefits of an annuity, aren’t more people purchasing them?

Annuity returns are like bond returns and may be a suitable bond replacement if you are drawing from your bonds for income. Buying an annuity is like entering a partnership agreement with other annuitants. If I die early, you will use what is left of my money, and if you die early, I will use what is left of your money.

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I have purposely not compared an annuity to a guaranteed income certificate (GIC) or a bond. That’s often how annuities are presented and often where the conversation stops, and the behavioural value of annuities is never considered. How do you measure the behavioural value? You know yourself, Peter. If an annuity is going to allow you to spend and enjoy your retirement without the fear and guilt of spending, then it is a good purchase.

Allan Norman, M.Sc., CFP, CIM, provides fee-only certified financial planning services and insurance products through Atlantis Financial Inc. and provides investment advisory services through Aligned Capital Partners Inc., which is regulated by the Canadian Investment Regulatory Organization. Allan can be reached at alnorman@atlantisfinancial.ca.

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