Recent changes to Manitoba’s pension legislation make the province one of the most permissive regimes in the country for unlocking locked-in accounts.
Amendments to the Pensions Benefit Act in Bill 8, which came into force Oct. 1, allow anyone over 65 to unlock 100% of the balance in their locked-in retirement account (LIRA) or life income fund (LIF) — common destinations for money moved out of a registered pension plan when an employee departs before retiring.
The provincial government hailed the changes as giving Manitobans more flexibility to manage their retirement, but the bill took Lea Koiv, president of Lea Koiv & Associates Inc. in Toronto, by surprise.
“Pension legislation is quite paternalistic, generally. Behind the scenes, the rationale for locked-in accounts seems to have been a belief that people can’t handle their money and may waste the funds if they’re given access to them,” Koiv said. “The fact that someone in Manitoba could now unlock the whole thing at 65 is quite astonishing.”
Jeff Sommers, partner in the Toronto office of law firm Blake Cassels and Graydon LLP, explained that only Saskatchewan takes a more liberal approach to locked-in funds, permitting LIRA holders over 55 to move all of their funds to a prescribed RRIF with no limits on withdrawals.
Several other jurisdictions — including Ontario, Alberta and at the federal level, which also covers the three territories — permit a one-time withdrawal from a locked-in account of up to 50% of the balance once the owner is 55 years old (50 in Alberta). However, the opportunity is time-limited under Ontario and federal legislation, requiring accountholders to apply for the lump-sum withdrawal within 60 days of opening their LIF. New Brunswick permits a one-time lump-sum withdrawal of no more than 25% of total holdings, although the province has no age restrictions.
“There certainly has been a trend lately, in terms of pension legislation across the country being amended to allow greater unlocking rights,” said Sommers, a former president of the Canadian Bar Association’s pension and benefits section.
It’s not a pattern he’s entirely comfortable with.
“I get the argument for flexibility. But as a pension lawyer, my whole life I’ve understood that the purpose of a pension plan is to provide a lifetime stream of income through retirement, increasing the standard of living and reducing reliance on government safety nets,” Sommers said. “I think these rules are moving us further away from that.”
The Manitoba Federation of Labour shares his concerns, arguing in a statement following the passage of Bill 8 that “any unlocking changes should be coupled with financial literacy tools to help individuals make informed decisions, as most Manitobans are not financial planning or pension plan experts.”
“Making these changes without making such tools available is just unfair and irresponsible,” the statement read.
According to Jim Yih, a pension consultant in Edmonton, holders of locked-in accounts can mitigate risks in managing their own money by obtaining sound financial advice.
“After a certain age, when you get into a comfortable pattern of spending, I think it probably makes sense to have the ability to unlock the whole thing,” Yih said.
As part of Manitoba’s pension revamp, the province also introduced its first financial hardship exceptions to the rules for locked-in accounts. These exceptions permit owners to apply for one-time access to some of their money when facing low expected income, uninsured medical expenses or if they’re at risk of losing their homes.
The changes brought Manitoba in line with most provinces, leaving only Quebec, New Brunswick and Saskatchewan without similar provisions. Newfoundland and Labrador added its own financial hardship exceptions earlier this year.
In contrast, every jurisdiction in Canada — except for Prince Edward Island, which has no pension legislation — allows unlocking by accountholders with shortened life expectancy or who leave the country. This typically kicks in after two years of non-residence in Canada, although some provinces impose additional requirements, such as a spousal waiver.
In addition, LIRAs and LIFs with “small balances” often can be unlocked. Each jurisdiction has its own definition of “small,” setting limits based on varying proportions of the year’s CPP maximum pensionable earnings ($61,600 for 2021). Some provinces also require accountholders to hit a certain age before they can withdraw the locked-in funds.
According to Yih, the first task for any financial advisor helping a client decide whether to unlock a pension is to help them figure out which rules apply to their funds. The governing legislation may not always correspond to the client’s residence, since the fund’s jurisdiction is determined by where the pension plan that deposited the money is regulated.
“Advisors need to be well versed in the various rules, no matter which province they’re based in,” Yih said.
Barbara Walancik, a pension and benefits lawyer with Koskie Minsky LLP in Toronto, welcomes the increased availability of unlocking for people in financial need, especially in light of the Covid-19 pandemic. Still, accountholders need to take special care before cashing out their locked-in accounts, she said.
“Spousal sign-offs are often required, it’s going to end up impacting your taxes for the year and the money will become available to creditors,” Walancik said, explaining that money in a LIRA enjoys creditor protection. “If someone has an urgent need for these funds, but they’ve also filed for bankruptcy, then they’re not going to get the money — they’re basically withdrawing a pension payment for their debts.”
Even people without financial worries should think twice before unlocking large sums, said Sarah Milton, a senior account manager with Clearpoint Benefit Solutions in Edmonton. In jurisdictions that permit one-time partial transfers from locked-in accounts, she said, moving a portion of the unlocked funds to a tax-deferred vehicle such as an RRSP can make sense.
“They’re still getting the monthly payments from the LIF, but they can dip into the unlocked portion if they want the payments to be a little higher,” Milton said. “It gives people far more flexibility when it comes to the amount of income they’re getting in retirement.”