Couple getting financial retirement advice from consultant at home

Ontarians experiencing financial difficulty resulting from the Covid-19 pandemic may be able to access money from their company pension plans, their Locked-in Retirement Accounts (LIRAs) or their Life Income Funds (LIFs) if they are eligible under the rules governing their pension plans or under Ontario’s Pension Benefits Act (PBA).

Last week, the Financial Services Regulatory Authority (FSRA) of Ontario offered guidance to pension plan sponsors, administrators and advisors, as well as current and former members of pension plans, in regard to questions they may have about their plans during the pandemic.

The FSRA guidance noted that, generally, money held in pension plans, LIRAs or LIFs is required to be used to provide a retirement income and is inaccessible for any other purpose. However, there are a variety of exceptions under which money may be withdrawn.

Pension plan members

Under the PBA, pension plan members may be able to unlock money from their DB plans in limited situations of shortened life expectancy. Eligible individuals considering taking such a step should contact the administrator of the plan for available options, FSRA advised.

Terminated members whose benefit remains in the plan

An individual whose employment and plan membership has ended, but who has left their pension benefit in the plan (as opposed to having transferred it out), may still have the option of transferring the value of the pension to a LIRA or LIF, depending on the terms of the plan and the individual’s age.

Once the value of the pension benefit is transferred to a LIRA or LIF, money may be accessible in certain circumstances. Notably, if a terminated plan member is eligible and elects to transfer to a LIF, they are then able to unlock up to 50% of the amount transferred into the LIF, but only within the first 60 days after the transfer.

Terminated members whose benefits have already been transferred to a LIRA or LIF

Under the PBA, specified amounts of money may be unlocked from LIRAs and LIFs under existing “financial hardship” unlocking rules, which “are administered by the financial institution that holds your LIRA or LIF (not FSRA), and they are flexible enough to apply to many situations resulting from Covid-19 pandemic,” according to FSRA’s guidance.

There are four categories of potential financial hardship: medical expenses; arrears of rent or debt secured on a principal residence (such as a mortgage); first and last months’ rent; and low expected income.

FSRA gave an example of a LIRA or LIF owner who has fallen behind on rent after being laid off as a result of Covid-19. That individual could apply to their financial institution to unlock enough money in the LIRA or LIF to pay the rent arrears and 12 months’ worth of future rent, as long as they have been given a written demand by the landlord to pay the arrears.

LIRA and LIF owners may apply for one unlocking application per category of financial hardship per individual. However, medical expenses allow for withdrawals related to multiple individuals.

“Covid-19 financial hardship could lead to permitted unlocking under multiple categories – for example, an individual who is unlocking due to rent arrears may also qualify for unlocking due to low expected income,” according to FSRA’s guidance.

In the guidance, FSRA said that it won’t object to financial institutions or administrators proceeding without a witness on a financial hardship unlocking form if the individual making the application is unable to get a witness to sign the form in their physical presence. However, FSRA indicated that institutions or administrators might require supplementary processes, such as virtual witnessing, to address liability risk.

If funds available under “financial difficulty” categories are insufficient, an individual with a LIRA may transfer an amount to a LIF, if they are eligible to do so, and then have the opportunity to unlock 50% of the value of the LIF during the 60-day window, says Lea Koiv, president of Lea Koiv & Associates Inc. in Toronto and a tax, pension and retirement planning specialist. Koiv points out that a LIF can be applied for as early as Jan. 1 of the year preceding the year in which the member would have been able to draw a retirement pension.

However, “consideration has to be given to whether those in financial difficulty […] should access funds in a locked-in plan,” Koiv said. Accessing money from LIRAs and LIFs may have adverse tax and long-term retirement planning consequences, she said.

Indeed, FSRA pointed out in its guidance that money withdrawn from a LIRA or LIF will need to be included in taxable income in the year withdrawn and is subject to withholding tax. In addition, withdrawn amounts no longer receive creditor protection under the PBA. Finally, financial institutions may charge a fee to unlock accounts.

Individuals considering unlocking a LIRA or LIF, Koiv said, should also keep in mind that withdrawing amounts from a LIRA or LIF may affect access to other government benefits, if a higher net income for the year leaves them ineligible for those benefits. Unlocking LIRAs or LIFs may also mean cashing out of investments at a time when market values are depressed; individuals will lose out on the opportunity to benefit from a recovery and build savings for their retirement, Koiv said.

The FSRA guidance suggested that anyone considering unlocking money from a LIRA or LIF should “obtain independent financial and/or investment advice to discuss your personal circumstances.”