You can repurpose locked-in funds to relieve the pressure and financial burdens of various parts of life. Doing so is a more efficient way to use funds you already have, but it relies on specific actions. From proving financial hardship to improving end-of-life care, here are some examples.
Name a New Beneficiary
As is often the case, you may not be able to directly withdraw funds to use at your own discretion. However, funds can be repurposed to benefit someone else. This is the case with specific savings programs, such as for education, and is a great way to allocate unused RESP funds. Other examples include transferring to a Life Income Fund or a Prescribed Retirement Plan. This allows for greater flexibility in resource allocation while also deferring any taxes.
Prove You are In Financial Hardship
There are many locked accounts and products you can pay into over your lifetime, and they usually incur penalties such as taxes and interest rates for early access. However, you can access partial funds from locked-in accounts if you are able to prove financial hardship. While this isn’t recommended for most savings accounts and programs, it can be a lifeline when times are tough. However, be aware that you can be taxed on early access and can also lose benefits.
Repurpose Locked-In Funds for Annuity
In the UK alone, over 2 million pensioners are struggling to make ends meet and afford the basics for a quality of life above the poverty line. Programs such as a local government pension scheme are excellent when combined with products such as an annuity after retirement:
- When you reach retirement age, locked-in funds can be used to purchase an annuity.
- A higher pension pot typically allows you to buy a larger annuity for retirement.
- Financial advisors can explain in detail how you can claim an annuity and access funds.
Improved End of Life Care
Pretty much everyone saves over the long term so they have a better quality of life later on. Such funding can pay for life events such as birth or marriage, an education, or retirement. However, death sometimes has other plans, and illnesses like cancer are a plague on modern society. If your life expectancy has been significantly shortened, you can unlock some funding to pay for care or improve your overall quality of life as you succumb to a diagnosed condition.
The Impact on Estate Planning
Retirement is a common reason for using locked-in funding programs. However, even before then, you may need access to funds for various reasons. Early access to funding, such as pensions and refinancing a home, can be a lifeline. However, you must consider the implications that accessing these kinds of funds can have on your legacy. While they can free up capital for short-term use, the long-term implications can have lasting effects on what you leave behind.
Summary
Naming a new beneficiary is an excellent way to repurpose locked-in funds, such as a RESP. However, you can also use funding to acquire an annuity for a better quality of life in retirement. Yet any early access to funds can diminish the legacy of your estate and what you leave behind.
