Relax the rules for locked-in withdrawals

The federal and provincial governments have some strict rules on what can and cannot be done with retirement savings that are held in locked-in plans. Unfortunately, those rules can sometimes result in financial hardship.

Locked-in RRSPs (also known as locked-in retirement accounts or LIRAs) are usually created when an employee leaves a company pension plan and the money vested in his or her name is transferred to a personal RRSP. In their wisdom, lawmakers decided to make it very difficult to gain access to these funds unless the plan is converted to a life income fund (LIF) or the assets used to purchase an annuity. Lump-sum withdrawals from locked-in RRSPs, which are permitted without limit in regular RRSPs, have been almost impossible to do.

That policy has created a lot of hardship over time. Every year, I receive poignant letters from desperate people who have locked-in money they can’t get access to. Here is an example:

“” have a locked-in RRSP that I took out about 16 or 17 years ago where I worked. Then I was laid off. I took the RRSP funds and transferred them to a GIC and then to a mutual fund, but it’s still called a RRSP. I now having serious financial problems. Is there any way I could access that money under the hardship clause?  It no longer belongs to the company I used to work for. Is there any help you can give me? – S.V.”

The entire issue has become a hot topic recently as calls for more liberal policies have increased. The matter falls under both federal and provincial jurisdiction, depending on who had responsibility for regulating the original pension plan. So it’s beyond the control of Ottawa to impose a national policy and in fact the federal government is trailing way behind the provinces in introducing reforms.

While Ottawa drags its feet, some provinces have taken steps to ease the rules. Quebec allows unlocking under a plan for phased retirement. In 2001, New Brunswick regulators moved to give account holders one-time access to 25 per cent of their locked-in assets (using a transfer to a regular RRIF, which has no limit on withdrawals). In the most radical move yet, Saskatchewan’s new rules, introduced in 2002, allow locked-in money to be transferred to a prescribed RRIF, essentially giving plan holders unrestricted access.

Ontario has also relaxed the restrictions, allowing people suffering financial hardship or shortened life expectancy to access their accounts, but only under certain circumstances. Most of the withdrawal rules come under the authority of the Financial Services Commission of Ontario. They are:

· Low income. If your pre-tax income in the next 12 months will be less than $26,600, you can apply for a withdrawal. This is the 2003 figure; it changes annually.

· Risk of eviction from your home or rental accommodation. For a homeowner to be eligible under this provision, that person or a spouse or same-sex partner must have received a demand in writing for payment of money owed on a debt secured by the residence. This could include a mortgage, property lien, or property taxes. In the case of a rental unit, a written demand for the payment of rent owed will do. In either case, if you need money from a locked-in plan to avoid eviction, you can apply.

· To rent a new place. This provision applies to those who need money to pay the first and last months’ rent on an accommodation.

· Medical treatment. This allows you to obtain money for medical treatment for yourself, spouse or partner, or for a dependant. The expenses cannot be covered by a provincial health plan, private health insurance, or any other source. You’re allowed to claim for expenses you have already paid as well as for future costs. A doctor’s letter is required.

· Home renovations. Only residential renovations relating to a disability or illness are eligible and that illness or disability must affect you, your spouse or same-sex partner, or a dependant. The renovations can be made to your home or the dependant’s home. You can also use money from this source in the construction of a new home if special features to accommodate an illness or disability are included in it. Here again, a doctor’s letter is needed.

If you own other assets, you may be required to sell them first before a withdrawal from a locked-in plan is permitted. However, there are a number of important exceptions, including your house, car, business (up to $50,000), and personal items like clothes and jewelry.

If live in Ontario and want to apply for a withdrawal under any of these conditions, send a letter to Financial Hardship Unlocking Section, Financial Services Commission of Ontario, 5160 Yonge St., Toronto ON M2N 6L9, or phone 416-226-7889. The minimum amount that you withdraw is $500. If your application is approved, you’ll be assessed a fee of 1 percent of the amount withdrawn (minimum $100, maximum $500).

There are also three other circumstances under which Ontario residents can make withdrawals from locked-in plans, but in these cases application should be made to the financial institution that handles the account. They are:

· Shortened life expectancy. If your doctor tells you that you have less than two years to live, you can withdraw some or all of the money from a locked-in account.

· Small accounts. If you are 55 or older and the value of all assets held in Ontario locked-in accounts is less than 40 per cent of the year’s maximum pensionable earnings (MPE), you can withdraw all the money in the accounts. The MPE in 2003 was $15,960, so if the plan is worth less than $6,384 you can take out the whole amount.

· Excess transfers. If you transferred more money from a pension plan into a locked-in account than was allowed under the federal Income Tax Act, you can withdraw the excess amount plus any investment earnings on that portion of the money.

If you live in another province, contact your provincial government for information on the rules that apply in your case.

Note that the federal government has made no provision for early withdrawals from plans under its jurisdiction. The website of the Office of the Superintendent of Financial Institution carries this answer to a question on the subject:

“The PBSA (Pension Benefits Standards Act) does NOT allow access to locked-in funds due to financial difficulties at any time. If your pension funds were transferable when you terminated employment, then it is possible to purchase an immediate life annuity or a Life Income Fund (LIF) at any time with the funds in your locked-in RRSP.”

Perhaps it’s time that Ottawa caught up with the increased liberalization in Ontario and some other provinces. This hard-line approach is clearly out of sync with the times.