Rules for Ontario Locked-in Accounts
Last winter, I informed you of changes made on June 19, 2009 in the regulations of the Ontario’s Pension Benefit Act. In that article, we touched on some of the changes that were introduced as of January 1, 2010. With the new year fast approaching, there are again new changes pertaining to Ontario Locked – in pensions that are to take place on January 1, 2011.
Depending on the originating plan, the rules of the Locked-in assets are governed by Federal or Provincial pension laws. Pension legislation requires that pension funds cannot be “cashed out” to ensure that the pensioner will receive benefits over the course of their retirement. In fact, the annual payouts on a LIF (Life income Funds) and LRIF (Locked in Retirement Income Funds) are subject to minimum and maximum withdrawals.
In July 2007, the Ontario government passed legislation to make it easier to access “Ontario” governed pension funds. Effective January 1st 2008, individuals could open a “New LIF” which gave account holders more flexibility to unlock and withdraw up to 25% of their total market value transferred into their “New LIF”plan. This transfer to the “New LIF” could originate from a LIRA, LRIF, Old LIF or other existing pension plan.
Once the assets were received in the “New LIF”, withdrawal of the unlocked portion (up to 25%) needed to be transferred within 60 days. This one time withdrawal (up to 25%) would be transferred to a RSP or RIF depending on the individual’s age.
The advantage of unlocking a pension and opening up a RIF plan is that RIFs are not subject to maximum yearly withdrawals. Keep in mind; any monies withdrawn from RIFs are fully taxable.
As of June 2009, the Ontario government passed new legislation that provided pensioners with the opportunity to unlock additional money provided they fit certain criteria. As of January 1st, 2010, individuals who had not previously unlocked a pension and who transfer their Locked-in pension plan to a “New LIF’ have the one time opportunity of unlocking 50% of the total market value of the “New LIF” account. The additional 25% from the previous 2007 legislation gives the owner additional flexibility. Rules regarding the transfer time allotted (60 days) and age of a pensioner remain the same as the 2007 legislation.
For individuals who have already unlocked their account to a “New LIF” before December 31, 2009, new legislation allowed the opportunity for an additional 25% to be unlocked from January 1, 2010 to December 31, 2010 only.
Additional legislative changes to the rules governing OLD LIFs, New LIFs and LRIFs are coming January 1, 2011 as follows:
- Effective January 1, 2011, plan holders that are in an Ontario Old LIF or LRIF are allowed a one time opportunity to withdraw or transfer 50% of the total market value of the assets to an RSP or RIF between January 1, 2011 to April 30, 2012.
- Effective January 1, 2011 plan holders that have transferred assets to a “New LIF” before Dec 31, 2009, they are no longer eligible for the 25% withdrawal or transfer.
- Effective January 1, 2011 the maximum amount that is paid from an Old LIF or LRIF will be standardized to the rules of the New LIF and calculated as the greater of a) the amount under the Schedule 1.1 “New LIF” formula or b) the fund’s investment earning’s of the LRIF or Old LIF in the previous year
- Effective January 1, 2011, plan holders of an LRIF with unpaid maximum amounts from previous years will not be able to carry forward the difference and add to a subsequent years’ maximum amount.
- After December 31, 2010 the owners of OLD LIF or LRIF will no longer be allowed to transfer their assets to a LIRA
As every situation is individual, please consult with your financial institution as they will provide you with more information. As well, the Financial Services Commission of Ontario at www.fsco.gov.on.ca provides the details of these changes and FAQ for your convenience.
