With the elimination of the Locked-in RRIF, the maximum Manitoba LIF payment calculation has been expanded to include a second calculation based on the LIF’s income earned in the previous year. In today’s interest rate environment, LIF annuitants in fixed term investments will see little change to their maximum payment as the Reference Rate calculation will provide a higher payment than any interest earnings in the prior year. Annuitants in mutual funds and/or self-directed plans may see a big change in their maximum payment based on the addition of the second calculation.
The income earned calculation is determined by: current year Jan 1 plan value less previous year Jan 1 plan value less previous year’s amounts transferred in plus previous year’s amounts transferred out plus previous year’s payments. (Lost yet??)
So let’s look at some examples.
#1 - Susan’s LIF of $189,236 (Jan 1, 2010 value) is invested in a self-direct plan of stocks, bonds and mutual funds. Her 2010 maximum payment made was $14,949.64 (age 70 factor of .079). Due to the suppressed markets in 2009, her portfolio has seen quite an increase through 2010 as markets gained momentum. Her LIF value as at Dec 31, 2010, will be $209,747. Susan’s 2011 maximum payment will be based on the greater of:
a) Reference Rate Calculation
age 71 factor equals .081 : $209,747 x .081 = $16,989.51
b) Previous Year’s LIF Income Earned Calculation
$ 209,747 - $ 189,236 - $0.00 + $ 0.00 + $14,949.64 = $35,460.64
Jan 1 Plan Value - Jan 1 Plan Value - Amts trsf in + Amts trsf out + Payments = Investment Income
2011 2010 2010 2010 2010 2010
So Susan’s 2011 maximum LIF payment will be $35,460.64, quite the increase from 2010’s $14,949.64.
From this example you can see how self-directed plans may see huge increases or decreases in maximum payments now that the calculation includes income from the previous year. Setting a LIF to pay the maximum automatically may cause some annuitants to receive much more in payments than expected or planned for. Should 2011 be a slow or negative growth year, annuitants could see a large decrease in the 2012 payment if they received $35,460 in 2011 and then only received the Reference Rate Calculated payment in 2012 that would be based on a lower plan value.
If you deal with clients/members who have self-directed plans, consider reviewing their next year’s payment prior to the end of this year so that they can make an informed payment decision.
#2 - Robert’s LIF of $123,000 (Jan 1, 2010 value) is invested in terms ranging from 2.4% and 3.25%. His 2010 maximum payment was $8,979 (age 66 factor of .073). His LIF value as at Dec 31, 2010, will be $114,532.17. Robert’s 2011 maximum payment will be based on the greater of:
a) Reference Rate Calculation
age 67 factor equals .074 : $114,532.17 x .074 = $8,475.38
b) Previous Year’s LIF Income Earned Calculation
$ 114,532.27 - $ 123,000 - $0.00 + $ 0.00 + $8,979 = $511.27
Jan 1 Plan Value - Jan 1 Plan Value - Amts trsf in + Amts trsf out + Payments = Investment Income
2011 2010 2010 2010 2010 2010
The maximum payment would be the greater of a) or b), so $8,475.38.
Now let’s add a little wrinkle to this. The MB Pension Regulations actually have a third calculation that is to be used when the annuitant has invested all funds in fixed terms and none of those terms are maturing in the year of calculation. Now this calculation has always been in the regulation but the way they were written previously gave the impression that it was only used if the payment amount was guaranteed over a multi-year period so credit unions were not advised of this calculation.
Now the Regulations state if the annuitant has invested all funds in a “multi-year period for which the LIF's rate of return is guaranteed must not exceed the maximum determined by the following formula:
Maximum amount = M × B1/B2”.
M is last year’s payment; B1 is current year’s Jan 1 plan value and B2 . . . well that becomes a little complicated.
B2 is called a reference rate balance which is determined by:
- if this is the second year of a multi-year investment – LIF value as at last year minus last year’s maximum payment plus (LIF value as at last year minus last year’s maximum payment multiplied by current year’s reference rate).
e.g. If none of Robert’s terms are maturing his B2 would be:
(123,000 – 8,979) + ((123,000 – 8,979)x 6%
114,021 + ( 114,021 x 6%)
114,021 + 6,841.26 = 120,562.26
So, because Robert has no fixed terms maturing this year and no funds in variable, his 2011 maximum payment calculation would be - M X B1/B2
M = 8,979 ; B1 = 114,532.27 ; B2 = 120,562.26
8,979 X 114,532.27/120,562.26
8,979 X .94998 = $8,529.87 2011 maximum LIF payment
This 3rd calculation increases Robert’s payment by a whole $54.49 but adds a tremendous calculation burden to the credit union.
In testing how this 3rd calculation will change an annuitant’s 2011 maximum payment I found the following if the annuitant was age 64:
- $80,000 LIF; 3rd calculation payment $7.65 greater than Reference Rate calculation
- $250,000 LIF; 3rd calculation payment $23.91 greater than Reference Rate calculation
- $750,000 LIF; 3rd calculation payment $72.67 greater than Reference Rate calculation
Check it out for yourself by using my MB Existing LIF Calculator found under my Tools for Credit Unions section along with a calculator for new MB LIF purchases.
Don’t ask me why the Manitoba Pension Commission has this 3rd calculation within its regulations. I tend to think that maybe they did not do the calculations. Especially now that LIF earned income from the prior year is brought into the mix, this 3rd calculation will be a detriment to annuitants if interest rates went up and they were in fixed terms not maturing in the year of calculation. An age 64 $80,000 LIF at 8% and a current year maximum payment of $5,680 would have an $80,720 balance the following year. His Reference Rate maximum payment equals $5,811.64, his Earned Income maximum payment equals $6,370 and that 3rd calculation would give a maximum payment of $5,786.86. So if this annuitant has no funds in variable and no fixed terms maturing for that year, his maximum payment would be limited to the $5,786,68, a payment which is $583.14 less than his prior year’s earnings.
Are you still confused? Provided you are a credit union/caisse in Manitoba, think about attending our spring 2011 Locked-in Registered Plans session. Watch our Calendar page for dates and locations that should be posted mid-February.