Government Of Canada: Please Release All Locked-In Retirement Money

by Mike Holman

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Some of you might be familiar with locked-in RRSP or RRIF accounts, otherwise known as LIRAs, LIFs, LRIFs, PRIFs and probably a few other choice names as well. These are basically RRSP or RRIF accounts that are locked-in so that the owners can’t get access to the money until retirement age. Even in retirement, the withdrawal amounts are limited.

The idea behind locking in the money is to protect the account owners from prematurely draining their retirement accounts and burdening government support programs such as GIS, in their old age.

How do you end up with a locked-in RRSP?

Employees who work for a company that offers a defined benefit pension plan (such as the government), will build up pension credits over time. If the employee should leave the job, they have a choice of:

  1. Leave their accumulated pension credits in the pension plan and collect a pro-rated pension at retirement age.
  2. Transfer the “commuted” value of their pension credits to a locked-in RRSP account which is called a LIRA (Locked-In Retirement Account)

If they are close to retirement age, option 2 is usually not available.

Contributions to a defined benefit plan need to be locked-in

If you are an active non-retired member of a defined benefit pension plan, you make contributions to the pension plan. The money you contribute is locked-in. You can’t withdraw it unless you leave the company and are eligible to transfer your pension credits out.

Money in a pension plan must be locked-in because of something called mortality credits

For an excellent description on mortality credits, please see the Oblivious Investor article on annuity payouts.

Very simply put – In order to run a pension plan properly, the administrators need to have some assurance that the money in the plan won’t be arbitrarily withdrawn by members. This is similar to buying an annuity. Once you buy – you can never undo the purchase. To do be able to do so would make it impossible to manage the annuity properly.

If an employee leaves the company and transfers their pension credits out – there is no necessity to keep the money locked in.  Because it is not part of a pension plan, mortality credits and any other pension-related reasons for locking in, no longer exist.

What if the money is unlocked and the former employee spends it all?

One might make arguments that the accounts should be locked-in to protect the investor from themselves. If the accounts are unlocked, the investor might cash out and not have enough money for retirement.

But what about regular RRSP accounts? Are they locked-in? Should the government make all rrsp accounts locked-in so that the investors are “protected” against themselves?

I don’t think so either. And it doesn’t make sense to me that people who make contributions to an RRSP account have complete freedom over their money, whereas someone who contributed to a DB pension plan and then converted it to a locked-in RRSP account (LIRA), does not have complete freedom over their money.

Both investors might have contributed the same amount, over the same time period and ended up with the same investments in very similar retirement accounts. But one can withdraw any amount from their account anytime, the other can’t.

Employee chooses between annuity (pension) or RRSP

When an employee leaves a pension, they make their decision to keep the money in the pension plan and collect a pension later, or they choose to remove the money from the pension plan and make themselves responsible for the money.

This choice is similar to a retired person who has to choose between using some or all of their investment portfolio to buy an annuity (guaranteed income), or keep the money in their RRSP or RRIF account.  If they choose the annuity, the money is used to buy an irreversible annuity which will have guaranteed income for life.  If they choose to keep the money, they will be responsible for looking after the administration of the retirement account as well as withdrawals.

If the employee chooses not to remain in the pension plan, they should be able to transfer their pension money into a regular RRSP, where they will have full control over the investments as well as withdrawals.

Locked-in retirement accounts should be under federal rules

One last item, while I’m on the topic – Why, oh why are the locked-in retirement rules under provincial jurisdiction?  The rules for withdrawals are different for every province.  This is silly.  If you have a TFSA or an RRSP – it doesn’t matter where you live, the rules are the same.  Locked-in retirement accounts should also have the same rules, regardless of which province the locked-in money originated from.

Or better yet – just eliminate locked-in retirement accounts!

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{ 30 comments… read them below or add one }

1 Leslie

Mike, you can add to the mix different rules for locked in retirement plans for employees working under federal jurisdiction such as rail, radio, tv, banks, crown corporations etc. Many of the provinces are relaxing rules for withdrawing money from locked in plans but the feds are moving much more slowly on this.

I agree to some extent with your contention that people should be allowed to have control over their retirement savings regardless of whether it’s in a locked in plan or an RRSP; however many companies have a matching contribution policy and I’m not sure if the intent is to ensure the benefit they conferred on the employee (preparing for retirement) is not lost for some reason. The reality is whatever the reason a person may have for wanting to withdraw funds early from a RSP (locked in or otherwise), he/she is going to need money in the future to live on when they have fewer options to generate income. Paternalistic, definitely. But I look around at some of my peers within ten years of retirement with the result of a lifetime of ‘I want it now’ represented in their savings (that would be zip, but they have nice cars and great vacation memories), and am dismayed for them. Many of them needed to have someone else doing the saving for them. Hopefully your peers and those coming up will learn from the wailing soon to erupt from the retiring masses.

2 Tax Help

Mike,
 
The Government of Canada can make legislation for federally regulated pensions. This federal government employees, railway workers, banks and a couple of others. I believe (and I could be wrong) but most people who have or had pensions would be covered by the provincial unlocking rules.

3 schultzter

You only refer to Defined Benefit pension plans, but the same applies to Defined Contribution plans too – particularly if the employer is making matching contributions.

4 Mike Holman

@schultzer – As far as I know, defined contribution plans are not locked in. Sometimes, employer contributions are locked for a period of time and can’t be transferred out, but it’s not forever.

For example I have a DC plan at work which is 100% employer funded – it’s not locked in at all. It’s basically just an RRSP account.

5 Patrick

I don’t know a whole lot about this issue, but I always thought it would be weird to offer people what amounts to a huge cash bonus for quitting their job.

6 stueegee

If your DC plan is tax sheltered as you build it over the years it is definitely locked-in when you retire except in Sask. Ontario allows 50% unlocking now when you retire and transfer your funds (required by law) to a LIF Locked In Fund. Other provinces have different locking %’s and most allow only a small % withdrawal every year. Ontario’s withdrawal schedule used to increase the % yearly till you could withdraw 100% at age 90. Now they allow you to withdraw whatever amount your fund earned the previous year and if you didn’t W/D it all you can carry forward. Sask’ unlocked all these in 1992 and according to someone I talked to at their Finance ministry there wasn’t a problem of broke spendthrift seniors applying for wellfare afterward. On the other hand if you deplete your fund by 7% every year it won’t last long. I find that investing in high yield former trusts gives me some monthly dividend income to slow the burn rate of the principal. Sure works better than ETF’s Mutual funds and growth stocks.

7 Mike Holman

@stueegee – I think you are confusing DC with DB – not the same thing.

8 mike

I am receiving loss of earnings biweekly from wsib.they are to pay me until I turn 65.This is the only income I have now.I just turned 52.I have some locked in rrsp which I trasferred to my bank after i lost my jo b due to ijuries.My question is can i get a monthly income from those rrsp when I turn 55, and if i can who determines the amount that i should receive
You might say leave them until you are 65 my answer is I want to use this money because nothing is guranteed these days and I dont know when my day will come.
the amount is roughly 57000 dollars

9 Eclectic Investor

@ Patrick:

What cash bonus for quitting?

The employee contribution to the pension plan is the employee’s own money and the employer contribution is an earned benefit.

Say instead that the departing employee had forty hours of overtime owing – do you consider paying the owed overtime a cash bonus for quitting?

10 Patrick

@Eclectic Investor: Well, yes I would. Before they quit, they have “overtime owing”. After they quit, they have cash. Perhaps “bonus” is the wrong word, but I think we agree on the essentials here. (Or would you not prefer cash over “overtime owing”?)

11 Eclectic Investor

@ Patrick: I think we disagree as somehow you answered that the overtime payment is an extra.

My point with the “overtime owning” is that the overtime payment is the same whether employee stays or not. This is not a bonus or extra – it is what was worked and is owed.

Now apply this to the pension, which is similar to the overtime. The amounts deposited are earned – up until the employee quits. Quitting stops future deposits (just like more overtime can’t be worked) plus forces a transfer to be locked-in (i.e. LIRA).

Your original comment equated the gov’t unlocking the LIRA to being the same as extra cash (or bonus) for quitting. Unlocking the account does not add cash, it gives access to what is already there – so I ask again, what cash bonus for quitting?

Fictional Example:
Employee who stays – Pension of $20K, plus will earn more pension in future.
Empolyee who quits – Pension of $20K plus no more pension contributions.
Can convert pension to a $20K LIRA.
If gov’t grants access to LIRA, can withdraw/pay taxes from the $20K.

12 Patrick

@Eclectic Investor: I do understand that these amounts are the same on paper. But I can’t buy a TV with a locked-in retirement account. Liquidating these accounts obviously has tremendous value—otherwise, why are we even having this discussion?

13 Eclectic Investor

@Patrick: Good that we agree the amounts are the same, without anything extra or bonus. And yes you can buy a TV with a LIRA. You have to wait for the payments at retirement, like the rest of the db pensioners. *grin*

To answer your question about this discussion – it is about flexibility and control of pension credits. Does the gov’t really need to have the LIRA restrictions in place?
If not – the credits be put into an RRSP?

I don’t see liquidating having value. Liquidation in an unlocked situation to me means withdrawals from the RRSP. How is this going to add value, after taxes are assessed?

Personally, I think this change will likely result in pretty much the same situation as today. Most people I know quit a job for a better job. Take me as an example – I found a job that paid 40% more and when I evaluated the pro-rated pension amount, I decided I could do better than a 3% return over forty years to get a guaranteed $50 per month . If I’d had the choice of transferring to an RRSP then (or could transfer the LIRA to an RRSP now), I’m not going to withdraw anything. I’m already paying more taxes – withdrawing from the RRSP will add more taxes – which does not make sense.

Now let’s look at the other end of the spectrum – someone quits for a better job, is fired from the new job and can’t find work. Guess what? They can make a hardship case and access the LIRA *today*. Nothing has changed – except if it was an RRSP, none of the hardship paperwork/approvals are required.

So where is the big risk that the gov’t is protecting the public from?

14 Patrick

@Eclectic Investor: Let me make sure I understand: you say liquidating a LIRA has no value? In that case, people should be indifferent, so why should anyone care that it’s locked in?

The time value of money is a well-established principle that says money now is worth more than money later. Otherwise, why are we having this discussion?

15 Eclectic Investor

@Patrick:

Mea Culpa … to underscore my point, I exaggerated. What I should have said is that liquidating the LIRA has a range of value where those who just don’t quite qualify for hardship will find it the most valuable and those who do qualify for hardship or don’t need the income will find little value.

Where there is little or no value, people will care because unlocking the LIRA provides more benefits than liquidation. Some examples include but are not limited to:
a) simplicity – one set of rules instead of two (RRSP + LIRA).
b) less overhead – one RRSP account instead of one RRSP + two LIRAs.
c) economies of scale – all money is in the RRSP instead of 90% RRSP, 5 % LIRA #1, 5% LIRA number #2 – which one has the spare cash to buy what is a bargain, in reasonable number of shares.
d) flexibility – the option to withdraw can make sense where a leave of absence without pay is available.
e) less effort – if all money flows into the RRSP (LIRA plus contributions), there are no phone calls required to figure out why two Ontario LIRAs were not combined into on Ontario LIRA.

To underscore why liquidation is not currently attractive, say when when the LIRA was created it was worth $1. Now twenty years later, it is worth $2.50. If it is liquidated (i.e. transferred to RRSP and withdrawn), the taxes of approximately $0.90 in taxes with a final value of $1.60 is far less attractively than letting $2.50 grow tax free. There are factors that may change this (e.g. unpaid leave of absence, lower tax rate after retirement) – but until they kick in, the taxes outweigh the “benefit” of cashing in.

As for the time value of money, in my situation, $2.50 growing tax free (assuming similar investment performance/tax rates) is more valuable than $1.60 at the same rate with taxes constantly being taken out it.

As for the discission – unlocking the LIRA provides far more benefits than liquidation on it’s own provides.

Cheers

16 Patrick

@Eclectic Investor: Ok, I see what you mean. Unlocking a LIRA has quite a bit of value aside from liquidating it.

I can’t help feeling, though, that this only bolsters my point that a person given the choice between job #1 with a LIRA and job #2 with the same money in an RRSP or cash would have a perverse incentive to switch jobs for no other reason.

17 Eclectic Investor

@Patrick: First off, unlocking the LIRA presents a different choice.
The choice is job #1 with a db pension or job #2 with either the pension credits in an RRSP or tax reduced cash if withdrawn (or some combination of the two).

Secondly, there are a lot of factors that have to be in place to make quitting worthwhile.
Some include:
a) employee has to be at job #1 long enough to join the db pension and have it vest.
b) employee has to quit job #1.
c) employee must decide to leave the db plan as the guaranteed benefit is too small/at risk.
d) job #2 can’t offer a db plan that allows a reasonable transfer of pension credits from job #1.
e) employee’s financial situation/plans make the after tax cash amount worthwhile compared to letting the total amount transferred to the RRSP grow tax-free.

I doubt many would consider it as most people, myself included, aren’t aware of LIRAs etc. until *after* taking job #2 and deciding to leave the db pension. Even if aware, this is a complex scenario to figure out that is likely outweighed by say, a larger salary. Most people I know find the db pension formula/benefits too difficult to figure out, never mind moving on to the question “is the benefit of quiting/getting cash worthwhile?”.

Thirdly, db membership is dropping, reducing the number who could quit (1991 at 86% and 2006 at 73% – see Stat Can link).
http://www.statcan.gc.ca/pub/75-001-x/2009105/article/10866-eng.htm#a2
I’d prefer if I could find stats on the number who leave db pensions yearly but no luck.

Bottom line is that if LIRAs were unlocked, I expect that with a few exceptions most will decide quit or stay based on comparing job #1 and #2, without considering db pension credits. If you agree, then the question becomes why the gov’t gives flexibility to hardship cases but is requiring me to follow two set of rules, one for the RRSP and a different one for the LIRA.

Cheers

18 Patrick

@Eclectic Investor: Some good points. I’m definitely with you when you say the government had better have a good reason for enacting rules that restrict people’s freedom.

19 Eclectic Investor

@Patrick:

Which means the question is why the government has the restrictive rules in place today.

The only reason listed in the article (and that I can think of or heard anyone propose) is the “prevent people from withdrawing”.

Again – I’d like to get numbers on how many transfers from db to LIRA happen but as I’ve outlined, I expect that if the restrictions were removed (i.e. unlocked), the numbers wouldn’t change a whole lot.

20 Colleen

Hey Mike,

I’m having the hardest time with my lira. I worked at a company in manitoba and had a defined contribution plan, but I have since left that company. I contacted sunlife financial to get the $ transferred to an RRSP so I could withdraw some of the $. I was told I could not and that it has to stay in a locked in account as the plan originated in ontario? Would you be able to shed some light on that?

21 AJ

Hi,

I have a LIRA account with a bank in Canada. I had to move the pension funds from a former employer into some sort of retirement account back in 2002, and the bank recommended a LIRA.

I moved permanently out of the country shortly thereafter, and am wondering if there is anyway to withdraw the funds since I have no intention of residing in Canada again.

22 Mike

I have quite a bit of money in my LIRA (locked in pension plan) acc’t held with GWL for over twenty years. Is there a way to transfer some of these funds to an acc’t where I can withdraw a portion of these funds to make a downpayment on my first home purchase. I lost my heriditary home to a flood. So it’s quite urgent that I find a way to purchase a home for my family. I reside & will continue to live in Manitoba. If anyone out there has any ideas on how I can go about transferring funds or using a portion of these funds for a down payment I’d be very interested in the process (if there’s one). Thanks, Mike

23 Mike Holman

@Mike – read this:

http://www.moneysmartsblog.com/how-to-unlock-an-ontario-locked-in-retirement-account-lira-lrif/

It has links so you can figure out which rules apply to your account.

24 Todd Sandrock

I know this thread is quite old, but it has been quite instructive. Here’s my tale of woe: Quit Nortel months before bankruptcy, and started with the Federal Government without missing a day of work. Transferred my commuted value from my Nortel pension to a LIRA, because I had an idea that the Nortel pension would get caught up if there was a bankruptcy (and there was, and it was).

Now I am unable to transfer my LIRA to buyback service with my new Federal pension administrator because the financial institution cannot release it and remain in compliance with law. The financial institution must guarantee that the new administrator will administer the funds in alignment with the Ontario Pension Act. The Federal government cannot do this, as it administers pensions in alignment with the Federal Superannuation Act. So the bank will not permit the transfer of my LIRA.

Catch 22. Can’t used my locked in pension money to contribute to my new pension. Can’t even borrow the money to buy back service because I don’t have the RSP contribution headroom (which wouldn’t be a problem if I could just transfer the LIRA).

The Ontario pension administrator knows about the issue, but just shrugs its shoulders, and cannot explain the policy objective served by not letting me use locked in money to contribute to a locked-in pension where it will almost certainly be administered in alignment of the intent of the Ontario Act.

Cheers.

25 Jason

Hello,

I am taking a buyout at work (GOC) which includes a “pension transfer value” amount. That amount will see me receiving half in cash with the other half going into a LIRA. I am using my buyout to invest in a small business and want to know how I can access the funds in the LIRA, either in part or whole. I am 39 years old currently.

Regards,

Jason

26 Brian Dougan

Dear Mike,

Last year I wrote you a short Email. I wanted to know if I could unlock a small pension. You led me into the federally regulated rules–I spent a few years with Bell Canada. Now I’m over sixty, and working my last year in Korea. The amount I have is almost smaller than a “Hill of Beans.” It’s about $13,000. Argosy Securities (Ottawa) administers the funds. Last year I withdrew the money from the stock market; so it’s in cash at the moment.

My administrator is an astute money man; but doesn’t seem to know a thing about unlocking the funds. I explored several government websites, and finally found a release form that seems to be the proper one.

Slight complication: It seems that I need to get two notarized signatures: Mine, and my wifes. However; things are not going well with us. She is Taiwanese, and I’m having a lot of trouble. If I separate from her; how will I get my money? I’m quite put out by this. I invested fourteen thousand dollars on an apartment in Taiwan. Her idea. Guess who has full control of that money? Not me.

Last night I read (In Albeta; at least) that a spouse’s signature is not required for a small amount–it’s not enough to provide a pension. No kidding. However; I thought that the amount could not exceed about $20,000….now the figure seems to be $10,000. Which is it?

Mike: I can’t get any answers for my questions, and being married seems to be the stumling block. I can’t find an address for the Bell Canada Pension Adminstration. Would they have the pertinent answers?

It’s only $13,000; but I will need it. I can wait until sixty-five. At that time; what happens? Will they release the cash to me on my sixty-fifth birthday? Or; will this spouse “weight” continue to drag me down? I made two mistakes; one was getting married, and the other was not letting Bell keep the money. Two hundred a month pension at sixty-five is better than a paltry $13,000 cash. However…..

Thank you Mike.

Brian Dougan
South Korea

27 Kat Martell

Hi Mike,

I worked for the Government of Canada from 1997 to 2006. I found out from HR that, if I quit before my 50th birthday, I could withdraw my contribution and my employer’s portion of a LIRA. Some of the money was available and liquid but I was told that most of it would not be available to me for many years. On the advice of my financial advisor, I invested the LIRA in private real estate company in Saskatchewan in 2008. I still have not seen any interest on my investment after 5 years and I’m experiencing extreme financial hardship because of health issues. I’ve repeatedly contacted the company’s CEO, completed a couple of Financial Hardship Unlocking requests witnessed by a notary, to no avail. The CEO tells me that there is no liquidity at this time as the money is tied up in the project.
I’m not happy about that but there doesn’t seem to be anything I can do about it. Who would I ask to find out the date when the Locked-In status of my pension will be released? Does the fact that I transferred it from a federally-administered pension fund to a private company impact its locked-in status?
Any advice/information would be greatly appreciated. Thank you.

28 Kat Martell

Hi Mike,
I forgot to mention that I worked for the feds in Vancouver, BC and I now live in Montreal, QC. Don’t know if that’s relevant. And in fact this thread may be too old to elicit a reply.

29 Randal

I wanted too know about the locked in WSIB LRI is there any way too unlock this pension before 65 because of hardship also due too disability

30 Peter Hanney

I have an LRIF and RRIF account with a discount broker.

1. Please can you advise the latest conditions of these funds including details on the maximum and minimum amounts that UK residents may withdraw annually without incurring Canadian withholding tax.

2. Information on the ability to withdraw funds at any time incurring withholding taxes would also be useful.

3. It mentions on the internet that if I cite my wife as a surviving beneficiary, that the term of these LRIF and RRIF accounts is modified and aligned with her age. Is this a fact and if so how does one process this provision?

Any assistance with these issues will be much appreciated.

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