Note for plan members outside Ontario
Regardless of their current residence, former employees will be eligible for the benefits described in this article if they are former members of a pension plan that is registered in Ontario.
Similarly, former members of pension plans registered in Alberta, Manitoba and Saskatchewan, who have moved to other jurisdictions, remain eligible to acquire locked-in retirement income funds.
Amendments last year to the Ontario Pension Benefits Act and its Regulations provide more flexible access to locked-in funds for former members of registered pension plans (RPPs). The following three amendments are of particular interest.
• Former members may now acquire locked-in retirement income funds (LRIFs) in addition to the
existing locked-in retirement accounts (LIRAs) and life income funds (LIFs). Collectively, these
three plans are referred to as "prescribed retirement savings arrangements" or, in short,
"locked-in accounts."
• Individuals with shortened life expectancy are given access to both pensions and locked-in
accounts.
• Individuals who qualify under certain circumstances of financial hardship gain access to
locked-in accounts.
The legislative details of these amendments are complex. And even in its condensed form, this article is recommended as a "quick read and file." The quick read will acquaint you with the issues involved. In your files,
it will become a useful reference whenever an employee needs advice on this subject.
The parties involved
Pension legislation has traditionally provided rights to members, former members and their spouses, with
same-sex partners recently added to that group. For the purposes of the amended legislation, it will be helpful to accurately identify the individuals involved.
Former members are individuals who are no longer active employees, including those who are receiving pension payments, who are entitled to a deferred pension, or who have transferred funds to locked-in accounts.
A person has a spouse if he or she and a person of the opposite sex:
• are married to each other; or
• are not married to each other but are living together in a conjugal relationship
• continuously for a period of at least three years; or
• in a relationship of some permanence, if they are the natural or adoptive parents of a child.
A person has a same-sex partner if he or she and a person of the same sex are living together
in a conjugal relationship:
• continuously for a period of at least three years; or
• in a relationship of some permanence, if they are the natural or adoptive parents of a child.
Note that these definitions may differ from those in other legislation. For example, a common-law spouse qualifies under income tax legislation after one year of cohabitation while the definition above requires three years.
Ontario joins the LRIF club
Ontario's introduction of the LRIF became effective March 3, 2000.
In order to appreciate the need for another retirement income vehicle, it will be helpful to briefly review the background of retirement income options. Initially, life annuities or pensions were the only means of receiving income from registered retirement savings plans (RRSPs) and RPPs. The desire of RRSP holders to control and diversify plan assets into retirement led to the introduction of the registered retirement income fund (RRIF). Then, terminating employees wanted similar flexibility instead of an immediate or deferred pension – and LIRAs and LIFs were introduced.
LIFs were developed when RRIFs were subject to an age-90 limit. In order to assure an income for life, which is a cornerstone of pension legislation, the LIF was designed as a locked-in combination arrangement of a RRIF with an annuity contract.
The mandatory annuitization not later than at age 80, however, has not been well received by the public. Some just don't like big brother telling them what to do. Most are concerned they might have to lock their funds into an annuity when interest rates are low.
In 1998, Quebec amended its Regulation to remove the age-80 limit and permit the conversion of the fund balance to a life annuity at any time. Such an option became feasible after the RRIF became a lifetime plan under a new formula that repealed its age-90 limit.
LRIF features
The LRIF is a locked-in fund with RRIF-type features that assures an income for life without the disadvantages of the LIF. The LRIF is similar to the LIF except that it has a different maximum payout formula and an option to purchase a life annuity at any time.
The objective in developing the LRIF was to assure an income for life while also providing reasonable flexibility for withdrawals. The minimum RRIF withdrawal under the federal Income Tax Act also becomes the minimum LRIF withdrawal. The maximum withdrawal under Ontario LRIFs is the greatest of the following five amounts.
• The investment earnings.
• The excess of the fund balance at the beginning of the year over the net amount
previously transferred into the fund.
• In the first or second year of the fund, six per cent of the fund balance at the beginning
of each year (pro-rated as necessary for a partial first year).
• If the three amounts above are smaller than the minimum amount required under
income tax legislation, that minimum amount becomes the amount to be withdrawn.
• In Ontario, any unused withdrawal room can be carried forward from year to year.
All or part of the amount carried forward may be withdrawn in any future year in addition
to the greatest of the four amounts above.
The Regulations contain detailed rules for the establishment of the fund, transfers of assets, protection of spouses and same-sex partners, contract provisions and other administrative requirements. Although LRIFs make LIFs obsolete, LIFs have been retained in the legislation of the four provinces (e.g., to cover existing contracts and to facilitate transfers between plans).
Shortened life expectancy
In Ontario, owners of LIRAs, LIFs and LRIFs facing shortened life expectancy may now apply for lump-sum withdrawals from their locked-in accounts. The same applies to former members who are receiving pension payments or are entitled to a deferred pension under an RPP (hereafter referred to as pensioners).
The following rules apply:
• Owners of locked-in accounts must submit an application on an approved form
[Form 5 published by the Financial Services Commission of Ontario (FSCO)] to the
financial institution that administers the account.
• The applicant must supply a statement signed by a physician licensed to practice
medicine in a jurisdiction in Canada stating that, in the opinion of the physician,
the applicant has an illness or physical disability likely to shorten his or her life
expectancy to less than two years.
• The applicant must supply a signed declaration by which the applicant's spouse or
same-sex partner consents to the withdrawal, or the applicant attests to the fact that
he or she does not have a spouse or same-sex partner.
• An owner of a locked-in account may withdraw all or part of the money in the account.
A pensioner must withdraw the entire commuted value of the pension or deferred pension.
Financial hardship
In Ontario, owners of LIRAs, LIFs and LRIFs facing serious financial hardship may now apply for lump-sum withdrawals from their locked-in accounts. (There will be no commutation of pension payments or deferred pensions.) It should be noted at the outset that the emphasis is on serious financial hardship. The application to be submitted to the Superintendent of Financial Services is part of a 40-page package of instructions and statements (Form 6). Thus, a familiarity with the conditions involved could help you and your employee spend both the time and the effort only where an application has a chance of success.
Depending on the type of hardship, the following may be required.
• Original receipts and estimates of expenses.
• A complete list of the applicant's and spouse's or same-sex partner's assets and
liabilities, other than excluded assets and liabilities. Assets and liabilities of dependants
will also be considered in circumstances where the dependant is the intended beneficiary
of the withdrawal. Insurance policies are included assets.
• The written consent of the applicant's spouse or same-sex partner agreeing that funds
can be withdrawn from the account.
Applicants will be charged an administrative fee to partially offset administrative costs.
Other amendments
There are two other circumstances in which Ontarians may withdraw funds from locked-in accounts. The first applies to individuals who are at least 55 years old and whose assets in every Ontario LIRA, LIF and LRIF have a total value that is less than 40 per cent of YMPE, i.e., $15,040 for applications signed in 2000. The consent of the applicant's spouse or same-sex partner is required.
The second applies where the amount transferred from the former pension plan to the locked-in account exceeded the limit under the federal Income Tax Act. No consent of the applicant's spouse or same-sex partner is required.
Application is made by submitting Form 5 to the financial institution that administers the account. A separate application is required for each LIRA, LIF and LRIF from which money is to be withdrawn. As an alternative to a cash withdrawal, these amounts may be transferred to an RRSP or a RRIF, and thereby become unlocked.
Important points to remember
These rules apply to former members of plans registered under the Ontario Pension Benefits Act. They do not apply to individuals who worked for federally regulated industries.
It will be helpful for advisors to outline the following implications to potential applicants and
their spouses or partners:
• Money withdrawn is taxable. The amount of tax withheld at source may be less or
more than the tax owing at the end of the year related to that withdrawal.
• The withdrawal may affect the applicant's eligibility for certain government benefits
(i.e., through clawbacks or reductions of income-tested benefits).
• Money withdrawn from a pension plan or locked-in account is no longer creditor-proof.
• Money withdrawn will reduce or eliminate survivor benefits otherwise available to the
spouse or same-sex partner.
Information and forms
For more information, contact the Financial Services Commission of Ontario at their website at www.fsco.gov.on.ca.
The website provides access to press releases, the full text of the legislative amendments, and forms referred to in this article.
