The Quebec government’s removal of the maximum annual amount that can be paid to people aged 55 and older with a variable benefit account tied to a defined contribution pension plan or with a life income fund is part of a broader push to provide retirees with more flexibility to draw on their locked-in retirement savings when needed, says Joseph Bevilacqua, associate partner of investments at Aon.
The proposed amendment to the regulations for supplemental pension plans will allow these plan members to withdraw all or part of the balance of their locked-in variable benefits account or LIF at any time in one or more payments.
Read: 2022 DC Plan Summit: Considering flexibility when implementing in-plan decumulation
“The proposal . . . provides a little more flexibility and aligns with provinces, like Saskatchewan, that already allow members to unlock all those funds up front. . . .” he says. “This will [also] align the LIF product more [with other] products . . . used for retirement savings plan accounts [that have] less stringent locking-in rules. This increase in flexibility . . . is a good thing for retirees and individuals.”
The ability to unlock funds earlier can really help retirees as it gives them flexibility in retirement planning tools and can help them achieve overall financial wellness. “For example, if [retirees] are allowed to unlock a little bit more of their LIF early on or don’t have that six per cent limitation [like in Ontario], they can . . . postpone benefits such as old-age security or the [Quebec Pension Plan]. The longer [they] postpone those benefits, the bigger the amount they’ll receive when they do take them.”
QPP payments are also indexed to inflation, so the ability to delay taking those benefits could provide members with better protection against longevity risk, he says. Retirees are contending with a changing financial marketplace and many have had to rethink their financial situations because they may have carried a little bit of debt into retirement. “Current interest rates have significantly increased and retirees may not have factored the [higher costs of borrowing] into their financial planning. Allowing this sort of . . . unlocking does allow for changes in individual . . . economic circumstances.”
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However, this increased flexibility comes with increased responsibility for retirees, says Bevilacqua, noting it’s important that regulators, advisors, consultants, plan sponsors and financial institutions all understand their role in this as well.
Although there doesn’t appear to be a high number of people withdrawing all their savings from LIFs and VBAs to buy luxury items, he says it’s still important for regulators to put in good parameters to ensure retirees are equipped with the right planning tools when making withdrawals. Retirees also need to understand what’s on the forms and how an early drawdown can change their retirement income, particularly if the average lifespan is 90 years old.
“It also allows individuals to . . . stop and think before they sign on the dotted line. This flexibility . . . is good. But we also want to make sure that Canadians . . . are making an informed decision when drawing down their retirement savings early.”
Read: 2023 DC Plan Summit: Mitigating longevity risk key to ensuring income for life for DC plan members