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Unlocking of Pension Funds in Ontario


Area Pensions


Under pension standards legislation, there is generally the requirement that funds in a registered pension plan may only be paid out in the form of a pension. That is, the entire lump sum may not be withdrawn by the plan member. This may be contrasted with savings in a registered retirement savings plan—in these plans, the member may withdraw his or her RRSP funds(subject to taxation requirements). Recently there have been changes in various pension standards laws across the country to permit unlocking in some circumstances and subject to certain maximums.

In Ontario, unlocking has been permitted for the past few years upon application in permitted circumstances. These circumstances are: (i) where a plan member is experiencing financial hardship (including low income, risk of eviction, and need of money for certain medical expenses), (ii) where a plan member has a shortened life expectancy due to an illness or physical disability, (iii) where a member’s locked-in assets exceed limits set under the tax laws, or (iv) where the member is at least age 55 and the total value of the member’s account is less than a specified amount. In cases of financial hardship, the application must be made to the regulator. In the other circumstances, the application is made to the financial institution holding the funds.

Under the 2007 budget, the Ontario government proposed the introduction of a new form of life income fund(LIF), which would be more flexible and under which unlocking(up to 25%)would be permitted. The Ontario budget also proposed unlocking for individuals who become non-residents of Canada.

In July 2007, the law was changed to accommodate the new form of LIF proposed under the budget—this new form of LIF will be available as of January 1, 2008. Owners of these new LIFs will have a one-time chance to withdraw up to 25% of the funds in their account. The application for the withdrawal must be provided to the financial institution that administers the LIF within 60 days after the funds are transferred from the locked-in vehicle to the LIF.

The new form of LIF will also permit the unlocking of pension funds by persons who become non-residents of Canada. Effective January 1, 2008, such persons can apply to withdraw all the money in their account provided that they are a non-resident of Canada as determined under the tax laws and their application is made at least 24 months after the date of their departure from Canada.

The debate on the issue of whether unlocking should or should not permissible is a hot one and it continues. Proponents of unlocking argue that individuals should be able to manage and invest their own retirement funds if they so choose. Those opposed to unlocking argue that by forcing retirement savings under registered plans, this is a way to help ensure that individuals will have enough money when they retire and will not be a draw on the public purse. Whatever your position is on the unlocking debate, we will continue to watch how this unfolds across the country over the next few years.

To view the article, please visit the Benefits Canada website.

Article originally published by Benefits Canada, October 24, 2007

"Unlocking of Pension Funds in Ontario"