Unlocking Funds: The rules for accessing RRSPs and LIFs

FORUM Magazine


In May, the federal government released details of how individuals who have funds “locked up” inside of federal locked-in registered retirement savings plans (RRSPs) and life income funds (LIFs) will be able to “unlock” these funds. To facilitate the unlocking, two new types of contracts will be introduced: restricted life income funds (RLIFs) and restricted locked-in savings plans (RLSPs).

These changes will allow individuals to access funds from their federal LIFs in three circumstances: small balances, financial hardship and a 50 per cent, one-time unlocking.

Small balance limit

Individuals who are at least 55 years of age with total federal locked-in RRSPs, LIFs, RLIFs and RLSPs worth less than the “small balance limit” will be able to wind up their accounts and take the cash (which would be fully taxable) or transfer the funds to another tax-deferred savings vehicle, such as an RRSP or RRIF, in which there are no maximum withdrawal limits.

The small balance limit is equal to 50 per cent of yearly maximum pensionable earnings (YMPE), which in 2008 was equal to $22,450 (to be indexed annually to the average industrial wage).

The government has stated that under this rule, an individual can only transfer or withdraw funds from LIFs or the new RLIFs or RLSPs, and not from locked-in RRSPs.

To withdraw funds under this option, the individual needs to file an “attestation” (done on Form 3 of Schedule V of the Pension Benefits Standards Regulations (PBSR), 1985) with their financial institution showing all holdings in all federal LIFs, locked-in RRSPs, RLIFs and RLSPs, and stating that the total is less than that year’s small balance limit.

The individual also has to provide an attestation (done on Form 2 of Schedule V of the PBSR) from his or her spouse or partner (or if single, an attestation that they don’t have a spouse or partner) that he or she also consents to the transfer or withdrawal. Finally, the individual needs to acknowledge (also on Form 2) that funds unlocked may lose the protection from creditors, funds withdrawn may be taxable and that professional advice may need to be sought to fully understand the financial and legal implications of the withdrawal. The attestations on the forms must be made before a notary public, commissioner or other person authorized to take affidavits.

Financial hardship

Any LIF holder, regardless of age, facing “financial hardship” will also be able to unlock up to the small balance limit (2008 — $22,450) within a calendar year, provided all withdrawals are done within 30 days of each other. Withdrawals can come from any federally regulated LIF, locked-in RRSP, RLIF or RLSP. There are two conditions under which someone can demonstrate financial hardship: “medical or disability-related expenses” or “low income.”

The first condition is for individuals who expect to spend more than 20 per cent of their income in any given calendar year on medical treatment or disability-related expenses that have been attested to by a Canadian physician. The second condition is for an individual who expects to earn less than the “low income limit,” defined as 75 per cent of YMPE (2008 — $33,675). The maximum amount that individual can withdraw is equal to the small balance limit less 2/3 of the individual’s expected income for the year (less any financial hardship withdrawals).

Note that an individual could qualify under both conditions (high medical expenses and low income), but the total permitted withdrawals for any calendar year, regardless of reason, can’t exceed the small balance limit.

Individuals who make withdrawals based upon medical or disability-related needs must provide a certification signed by a licensed Canadian physician, disclose the amount of expected medical expenses and provide an attestation by the plan holder that he or she expects to spend more than 20 per cent of his or her income on such expenses. Individuals making withdrawals based upon low income must disclose their expected income for the year and attest that they expect their income to be less than the low income limit.

Both disclosures are done on Form 1 of Schedule V of the PBSR. The same spousal attestation and financial and legal acknowledgements discussed above must also be completed.

One-time unlocking

Perhaps the most dramatic change of all was the newly created flexibility allowing individuals who are at least 55 years of age to unlock up to 50 per cent of their LIF holdings and either cash it out (taxable) or transfer the funds into an RRSP or RRIF.

To be able to unlock, the funds in an existing LIF must first be transferred into the new RLIF. After that, within 60 days of the creation of the RLIF, 50 per cent of the RLIF’s value can be transferred into an RRSP or RRIF. After this point, however, the RLIF will be subject to the same maximum and minimum annual withdrawal limits as a LIF.

RLIF funds can never be transferred back to a LIF nor a locked-in RRSP. Instead, if an RLIF holder wishes to transfer the funds back to a locked-in savings vehicle because they don’t currently need a steady stream of retirement income, the funds can be transferred into the new RLSP.

These new plan types ensure that the 50 per cent unlocking provision can only be applied once by any one individual on any one LIF. As above, the same spousal attestation and financial and legal acknowledgements must be completed.

When can individuals begin unlocking? That will depend on how soon the financial institution that administers the individual’s LIF can make the necessary amendments to their specimen plan documents. They have until November 8, 2008, to do so.