Beware of Schemes for unlocking of Locked-In Pension Funds

Manitoban's should be wary about potentially fraudulent schemes being offered for unlocking pension funds. The advertisements for these schemes typically claim that locked-in funds can be converted into cash on a tax-free basis.

The Pension Commission of Manitoba is aware that there are a number of variations to this scheme being promoted.

The most typical scheme identified seems to involve transferring locked-in funds to a self-directed RRSP and subsequently purchasing shares in a private company. The company then makes a promise to loan to the owner of the locked-in funds, 70-80 percent of the funds used to purchase the shares. The loan is to be paid back at some future time.

A second scheme identified requires the owner of pension assets to give power of attorney to a trust company. The owner then requests a loan from the company totalling approximately 71 percent of the value of their locked-in assets. The money from the pension assets is transferred to a registered pension plan, an action that is not allowed under the legislation since the individual is not a legitimate employee of the sponsor. The power of attorney is supposedly exercised when the employee reaches age 69.

Taxpayers who respond to these kinds of advertisements risk losing retirement savings. In addition the loans may be taxable. If an RRSP is used as security for a loan, the value of the RRSP will be added to the taxpayer's taxable income. Similarly, if an RRSP is used to purchase shares of a private corporation and the shares are not a qualified investment under the rules, then the value of the shares will be added to the RRSP holders taxable income.

The public is reminded that the intent of pension legislation is to safeguard assets so that they are available for pension income purposes. Owners of locked-in pension funds are therefore advised to consult with The Pension Commission of Manitoba, an independent financial advisor or a tax advisor before undertaking any action regarding claims which suggests that pension funds can be unlocked.

Should you have any questions you may contact the Pension Commission of Manitoba by phone at (204) 945-2740 or by e-mail at pensions@gov.mb.ca.

Additional information regarding these schemes can be found on the following websites:

• Canada Revenue Agency

• Financial Services Commission of Ontario

• Ontario Securities Commission

• Office of the Superintendent of Financial Institutions

• Saskatchewan Justice, Pension Benefits Branch

• Nova Scotia, Environment and Labour, Pension Regulation Division

• British Columbia Ministry of Labour, Pension Standards Branch

• Alberta Finance, Employment Pensions

• Manitoba Securities Commission

• Regie des rentes du Quebec