Locked-in accounts – Why pension jurisdiction is important

The pension jurisdiction of an indi-vidual’s locked-in account determinesmany of the options available for theaccount. These include the variousretirement income options available,the age at which the locked-inaccount can be transferred to a retire-ment income option, beneficiary des-ignations, commutation (unlocking)rules and other access rules.

How is pension jurisdiction determined?Locked-in accounts are regulatedunder either federal or provincialpension legislation.

It is a fairly simple process to deter-mine if an account is regulated feder-ally. All employers whose activitiesare federally regulated will be gov-erned by the federal Pension BenefitsStandards Act, 1985 (PBSA). Theseemployers include individuals subjectto the federal Public ServiceSuperannuation Act, individuals enti-tled to locked-in benefits under theFederal Benefits Divisions Act, employ-ees of chartered banks, railways,telecommunication companies,Councils and Education Authoritiesof a First Nation, and individualsemployed in the NorthwestTerritories, Nunavut, and the Yukon.If you are unsure as to whether yourpension is federally regulated, we

suggest that you speak with your pension administrator.

If the account is not regulated federally, then it will be subject toprovincial regulation. As a result of an agreement between all of theprovinces, with the exception ofPrince Edward Island (PEI), the payment of benefits will be governedby the law of the province where themember was employed as of the datethe member becomes entitled toreceive a benefit from the pensionplan (sometimes referred to as themember’s final location or finalprovince of employment). Other thanin PEI, the law of the province wherethe pension plan is registered has nobearing on the payment of benefits.

PEI has no legislation governing theregistration of pension plans or thelocking-in of pension benefits,although in December 2010, the PEIgovernment announced its intentionto introduce pension legislation.Therefore, currently in PEI, unlessthe member is enrolled in a pensionplan that is registered in anotherprovince or under the federal PBSA,no locking-in rules apply. If the planis registered in another jurisdiction,the payment of pension benefits tothe PEI employee will be governed bythe law of the jurisdiction where theplan is registered.

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Why is pension jurisdictionimportant?Pension jurisdiction is relevantbecause it affects how individuals canaccess their funds, their retirementincome options, beneficiary designa-tions, commutation (i.e. unlocking),and many other issues. This articlewill focus on the most common areasof discussion.

Retirement income options

A Locked-in Retirement Account(LIRA), called a “Locked-in RRSP”under BC and federal legislation,must by converted to one or moreretirement income options no laterthan December 31st of the year inwhich the client turns 71. Under federal legislation, you may also have a “Restricted Locked-in Savings Plan” (RLSP).

Possible retirement income optionswill include life annuities, LifeIncome Funds (LIFs), Locked-inRetirement Income Funds (LRIFs),Prescribed Registered RetirementIncome Funds (PRIFs), and RestrictedLife Income Funds (RLIFs). Not alljurisdictions make all of these retire-ment income options available.

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A life annuity provides a predeter-mined payout from the time of trans-fer until the death of the annuitant.

A LIF and an RLIF have annual min-imum and maximum payouts, andthe maximum payouts are generallybased on the long-term bond rate,although some jurisdictions may alsofactor in the investment return fromthe LIF. In some jurisdictions a LIFmust be used to purchase a life annu-ity no later than December 31st of theyear in which the owner turns age 80.PEI and Saskatchewan are the onlyjurisdictions in which new LIFs can-not be purchased.

An LRIF is similar to a LIF in that ithas annual minimum and maximumpayouts, but the maximum payout isgenerally based on the investmentreturn from the LRIF in the preced-ing year. There is no requirement toconvert an LRIF to a life annuity atany time. New LRIFs are only avail-able in Newfoundland & Labrador.

A PRIF is only available in Manitobaand Saskatchewan. A PRIF has anannual minimum but does not havean annual maximum payout restric-tion, therefore providing the ownerwith greater access to their assets.Saskatchewan has no limit on thelocked-in accounts that can be trans-ferred to a PRIF, but Manitoba onlyallows a person to establish a PRIFonce in a lifetime, with a limit of notmore than 50% of that person’s com-bined LIF and LRIF accounts.

Age at which a retirement incomeoption becomes available

The date on which a LIRA/Locked-inRRSP can be transferred to a retire-ment income option is governed bythe pension jurisdiction. Accountslocked-in under federal, Manitoba,and Quebec jurisdictions can betransferred at anytime, although atransfer to a Manitoba PRIF or a fed-eral RLIF can only occur once at age55 or later. New Brunswick regulatedaccounts can be converted to a LIF atanytime, but to an annuity only atage 55. Alberta accounts can be trans-ferred once the member is 50 yearsof age or greater. All other accountscan be transferred at the earlier ofage 55 or the age at which the origi-nating pension plan would haveallowed the individual to begin toreceive a lifetime pension.

Beneficiary designations

The rules regarding beneficiary desig-nations also depend upon the juris-diction of the locked-in account. In alljurisdictions a surviving spouse orcommon-law partner is nearly alwaysautomatically entitled to receive theproceeds of the locked-in accountupon the annuitant’s death, even ifthe annuitant had attempted to designate a non-spouse beneficiary,and even if the marriage or partner-ship is relatively recent. However,Alberta, British Columbia, Manitoba,Newfoundland and Labrador,Ontario, Quebec and Saskatchewanspecifically allow a spouse or com-mon-law partner to waive his or her

rights to receive the death benefits,thus allowing the annuitant to legiti-mately name a non-spouse benefici-ary. Also, in some jurisdictions, if theannuitant can show that he or sheacquired the locked-in plan as aresult of the death of a former spouseor the breakdown of a relationshipwith a former spouse, the annuitantwill not need to designate his or hernew spouse as the beneficiary to theplan.

Commutation rules (“unlocking”)

As a general rule, an individual haslimited access to locked-in accounts,as they are intended to be used toprovide benefits for life. However,each jurisdiction allows some or all ofa locked-in account to be “commut-ed” or “unlocked” if certain condi-tions are met. These exceptions varywidely by jurisdiction, but in generala jurisdiction may allow a locked-inaccount to be commuted if the annui-tant’s life expectancy is “diminished”,if the account is “small”, if the annui-tant is a “non-resident”, and/or if theannuitant is in “financial hardship”.

Additional access to locked-in accounts

While the calculation of the mini-mum payout for all jurisdictions isthe equal to the RRIF minimum pay-out, the maximum payouts under thevarious retirement income optionsdiffer by jurisdiction. Some jurisdic-tions allow individuals greater accessto their locked-in funds in certain circumstances:

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3 Newfoundland and Labrador, NovaScotia, and Quebec provide “tempo-rary income” for “lower income” in-dividuals younger than the age of 65.

3 Alberta allows a one-time unlock-ing of up to 50% of the value of theLIRA when transferred to a LIF orlife annuity, subject to certain re-strictions.

3 Ontario allows a one-time unlock-ing of up to 50% of the value of aLIF, subject to certain restrictions.

3When a federal RLIF is established,the owner may unlock up to 50% ofthe assets transferred to the RLIFfrom other federal Locked-inRRSPs, LIFs, and pension plans.

3 As discussed above, Manitoba andSaskatchewan allow for transfers toa PRIF. Manitoba allows for a one-time transfer of up to 50% of thevalue of the account for individualswho are at least 55 years of age.Saskatchewan has no limits on thenumber or value of transfers andtransfers can occur at the earlier ofage 55 or the age at which the origi-nating pension plan would have al-lowed the individual to begin toreceive a lifetime pension.

Conclusion

To summarize, pension jurisdictionis extremely important in terms ofhow any locked-in account is admin-istered and the options available to

the owner of the account. Pensionjurisdiction can have significanteffects on an individual’s financialplan. For further information andadvice please contact your InvestorsGroup Consultant.

Insurance products and services distributed through I.G. Insurance Services Inc. (in Québec, a Financial Services Firm). Insurance licensesponsored by The Great-West Life Assurance Company (outside of Québec).Written and published by Investors Group as a general source of information only. It is not intended as a solicitation to buy or sell specificinvestments, nor is it intended to provide tax, legal or investment advice. Readers should seek advice on their specific circumstances froman Investors Group Consultant.

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“Locked-In accounts - Why pension jurisdiction is important?” ©2011 Investors Group Inc. (04/2011) MP1420