The key to unlocking funds in your LIRA or LIF
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Experiencing “financial hardship” due to COVID-19? Your LIRA or LIF could provide the money you need.
The Locked-In Retirement Account (LIRA) and Life Income Fund (LIF) were designed to ensure lifetime income. It stands to reason that they include restrictions to prevent people from spending their pension funds too quickly. However, since their introduction, changes were made to allow Canadians access to funds under specific circumstances… circumstances that many are facing now, due to the financial stress experienced because of the COVID-19 pandemic.
You are allowed to unlock funds, but only under specific conditions.
Under the Pension Benefits Act (PBA), money may be unlocked from a LIRA or LIF if their holders are experiencing “financial hardship”.
The four different categories of hardship are:
- 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
Robert Johnson, Certified Financial Planner professional, explains how it works in the case of arrears of rent. “If someone had fallen behind on rent because they were laid off due to COVID-19, they 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.”
Note: requirements to unlock retirement funds vary per province. The facts in this article apply to Ontario only. Requirements for provinces other than Ontario should be checked.
Apply at the financial institution that holds your LIRA or LIF.
The owner of a LIRA or LIF can submit one unlocking application per category of financial hardship, per year. (You could, therefore, make four different applications per year.) Medical expenses are the exception – they allow for withdrawals related to multiple individuals.
However, whether the person has one savings plan or multiple savings plans, it is possible to withdraw funds from these savings plans more than once in the same calendar year as long as this is done within 30 days of the first withdrawal
The appropriate form from the Financial Services Regulatory Authority of Ontario (FSRA) must be completed and provided to the financial institution that holds your LIRA or LIF. The financial institution reviews your situation to ensure it meets the requirements of the provincial legislation that governs the locked-in funds. Here are links to the required forms:
- 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.
Other allowable reasons to access funds
There are other reasons you may be allowed to access the funds in your LIRA or LIF. They include:
- If the amount is small (as of 2018, you must be at least 55 and the balance less than $22,360)
- If you have a shortened life expectancy. If you have a terminal illness or a disability that is expected to shorten your life considerably, your LIRA or LIF may be unlocked.
- If you become a non-resident of Canada, as determined by the CRA, you may unlock your LIRA or LIF.
Be aware of the implications of withdrawing funds.
“People should understand that there are several potential consequences of withdrawing funds from their LIRA or LIF,” says Robert.
The Canada Revenue Agency (CRA) will include withdrawn funds in your taxable income for the year in which the withdrawal was made. Your financial institution is obligated to withhold a percentage for federal income tax and remit that amount to CRA. Depending on your account, they may also apply withdrawal fees.
Because withdrawals increase your net taxable income, you could become ineligible for some government benefits. Unlocking LIRAs or LIFs may also mean cashing out of investments at a time when market values are low, compounding the market loss hampering the recovery of your retirement savings.
Another unforeseen consequence could be that once the funds are in your hands, they are no longer protected by the PBA (which protects money held in locked-in accounts from creditors). This applies to all withdrawals, including money you withdraw for financial hardship.
“Accessing funds originally designated as retirement income should never be done lightly,” says Robert, “because it could jeopardize the security of your retirement income.”
Before you make any decision, speak to an Educators financial specialist to explore all of your options.
Whether you’re looking for alternative borrowing options for you and your family or simply need a little guidance on how to financially navigate through these tough times—call on Educators Financial Group. Since 1975, we’ve been helping education members navigate through many ups and downs. No matter where you are on the pay grid, or what your pension income is in retirement, we can provide you with sound, educator-specific advice to help ease your mind and reach your financial goals.
Have one of our financial specialists reach out to you.
Sources:
https://www.fsrao.ca/consumers/pensions/withdrawing-locked-accounts-because-financial-hardship
https://www.investmentexecutive.com/news/industry-news/fsra-offers-guidance-on-unlocking-liras-and-lifs-during-covid-19/
https://www.osfi-bsif.gc.ca/Eng/pp-rr/faq/Pages/ulk-dbc.aspx
https://www.fsco.gov.on.ca/en/pensions/lockedin/faq/Pages/locked-inaccountchanges.aspx
