How to use your locked-in RRSP in a crisis

Sometimes life takes an unexpected turn and you’re suddenly out of work or facing huge expenses due to family illness without the means to pay the bills. It may not have crossed your mind that you might be able to access your locked-in retirement savings to help get you through the crisis.

The upside of going this route is that getting the money when you need it may help you avoid dire consequences like eviction or mortgage foreclosure. The downside is of course, that your future retirement income may be significantly eroded.

If you elected a transfer out of an Ontario workplace pension when you left a previous employer or the plan was wound up, the money was moved to a locked-in retirement account (LIRA), a life income fund (LIF) or locked-in retirement income fund (LRIF).

Normally, you must wait until you turn 55 before you can start receiving payments from your locked-in account and there are limits on the minimum and maximum payments you can receive in any one year.

The reason for this says Barry Gros, an actuary and senior executive with pension and benefits consultant Aon Hewitt, is because locking-in is meant to ensure that money set aside for retirement is used for that purpose.

However, you can unlock up to 50 per cent of your pension at the time of transfer and you might be able to gain special access to your locked-in accounts in a variety of other circumstances, including if you are facing specific forms of financial hardship.

The financial hardship categories in which Ontario permits unlocking of pension accounts include:

•Your expected income from all sources, before taxes, for 2011 will be less than $32,200.

•You risk eviction for arrears of mortgage payments or rent.

•You need a first and last month’s rent to secure a place to live.

•You have medical or dental expenses not covered by government or private health care insurance.

•You need to renovate your home to accommodate a disable or ill family member.

In 2009, more than 11,000 financial hardship unlocking applications were approved by the Superintendent of Financial Services and over 80 per cent fell into the first category above – inadequate income.

How to get the money?

If you live in Ontario, please make sure your pension was earned in the province. If it was federally-regulated (i.e. banking, telecommunications or airline transportation) or as a result of employment in another province, you will have to seek advice from pension supervisory authorities in the relevant jurisdiction.

Then complete one or more very detailed forms which can be found on the Financial Services Commission of Ontario website.

FSCO senior public affairs manager Rowena McDougall says it’s vital to read the form carefully.

“It is very important that your financial situation falls into one of the qualifying categories, or it cannot be approved.”

FSCO has 13 full-time employees processing financial hardship unlocking applications. McDougall says it usually takes between five and 10 business days to approve applications, providing the documentation is complete, but in urgent cases such as an imminent eviction, FSCO will try to expedite matters.”

How much money can you get?

The amount you can withdraw due to low income is based on your expected income from all sources. For example, the maximum withdrawal based on an expected income of $0 is $23,600.

If your mortgage payments, property taxes or condominium fees are in arrears and you have a letter threatening eviction, an amount to cover these obligations will be paid to you in a lump sum. You may also withdraw enough to keep these bills up to date for the next year.

But keep in mind that once your money is withdrawn from locked-in accounts, it can be seized by creditors. Income tax will also be deducted at the time the withdrawal is made.

What’s the impact on your future retirement income?

McDougall says the average withdrawal is about $10,500. Gros says that the impact depends very much on the individual’s age, but if a 55-year old takes out $10,000, he or she could be reducing their pension by as much as $5,000-$8,000 a year.

So when does it make sense to tap into locked-in retirement savings to help meet current financial obligations?

“I’d hate to see a total unlocking of pensions accounts, but what we are talking about is somebody who might actually be on the verge of poverty or on the cusp of being eligible for other social assistance,” says Gros. “So I don’t have any problem with the concept of hardship withdrawals whatsoever.”

Sheryl Smolkin is a Toronto pension lawyer and writer.