Confused about your pension?
The current regulatory structure for Canadian company pension plans is so chaotic and bewildering that few people are able to figure out where they stand. Some stand on higher ground than others. The rules are different, and in some cases unfair, depending on where you live and work. How your employer is classified by legislation is another factor.
Employer-sponsored pension plans are regulated according to:
· Different pension rules in each province and territory.
· Family law regulations in various jurisdictions.
· Federal Income Tax Act rules.
Also, provincial law may be overridden if your employer or occupation falls under federal jurisdiction.
In the end, a company with offices in all provinces and territories might have to comply with as many as nine different sets of rules for its pension plan. No wonder even plan administrators have trouble keeping up!
The main concern, however, is that this labyrinth of rules can affect your pension benefits. Here’s one notable example of how differing rules put some people in better financial shape than others:
· When you leave your employer, some pension plans allow you to me your accumulated pension assets into a Locked-In Retirement Account (LIRA). As with an RRSP, the money in a LIRA must be transferred to a fund to provide a flow of retirement income before the end of the year in which you turn 69.
Options and differences
Options for transferring funds in a LIRA include:
· A life income fund (LIF).
· A locked-in retirement income fund (LRIF).
· An annuity.
But not everyone has the same options. For pension plans registered outside of Alberta, Manitoba, Saskatchewan and, most recently Ontario, a LRIF is not an option.
Why is this important? Because LRIFs are very often the best option – providing the maximum control over your assets.
Both LIFs and LRIFs are similar to RRIFs (Registered Retirement Income Funds) in that:
· You must withdraw a set minimum amount annually. (RRIFs are defined by the Income Tax Act, while LIFs and LRIFs are pension terms.)
Holders of LIFs and LRIFs must also:
· Comply with maximum annual withdrawals. This does not apply to RRIF’s.
· Maximum withdrawals from a LIF and RRIF are set according to the holder’s age and long-term interest rates.
· Maximum withdrawal amounts for an LRIF are more flexible. The withdrawals will be based on a number of factors, including how much the fund earned in the previous year. In Ontario, any part of the maximum not withdrawn in a given year can be carried over to the maximum in the following year.
Another important difference:
· The balance in a LIF at the end of the year a holder turns 80 must be used to purchase a life annuity. There’s no such requirement with an LRIF, so you keep control of your funds.
Many rely on company pensions
Inequalities in pension legislation also show up even as positive changes are being introduced. For example:
· Ontario’s recent move to allow access to locked-in funds for plan holders with small balances in “hardship” situations, or with shortened life expectancy due to a medical condition.
· Similar concessions are available in a few other provinces, including British Columbia, Manitoba and Quebec. Again, these concessions depend on how your pension plan is registered.
Currently there are more than 15,000 employer-sponsored pension plans in Canada, holding over $600 billion in assets. They clearly play an important role in the retirement plans of many Canadians. As they stand, such plans are expensive to administer. The high costs may prohibit many other employers from offering them, to the detriment of employees.
There’s no reason why pension rules shouldn’t be streamlined, simplified and standardized. It would be much more equitable – and a lot less confusing – if all Canadians faced the same rules.
David Tafler, Publisher and Editor of CARPNews FiftyPlus, is also a writer and commentator on retirement and financial planning.