FAQ
Leaving Your JobWhat does "locked-in" mean?
Wind-Up of Your Pension Plan
Are there online retirement calculators?
Leaving Your Job
When you terminate your employment and you are in a pension plan, you have several options.
If you have less than two years of membership in the plan when you terminate, you are said to be "not vested." You will get a refund of your own contributions to the plan, plus interest. You can take this refund as cash (with tax withheld), or have it transferred to your personal RRSP or the pension plan of your new employer (tax sheltered).
If you have more than two years of membership in the plan when you terminate, you are said to be "vested." If you are vested, you are entitled to a deferred pension. A deferred pension means that you can leave your accrued pension in the pension plan until you retire. When you retire, you get pension payments from the plan. If you do this, you must tell your former employer whenever you change your address. They must be able to contact you when you are entitled to receive your pension.
Your plan may provide for vesting earlier than two years of membership.
Under a defined benefit plan, once vested, you are entitled to a deferred pension. You might also have the option to receive a locked-in lump sum. This lump sum would be equal to the commuted value of your accrued pension. You can transfer this lump sum to a locked-in retirement account or life income fund, use it to purchase an annuity, or transfer it to the pension plan of your new employer. All of these transfer options fall under the concept of portability. If you are over a certain age, usually 55, your defined benefit plan might not allow portability, and you might be required to take the deferred pension option.
Under a defined contribution plan, once vested, you may choose either a deferred pension or a transfer of the balance of employee and employer contributions. If you choose to take the balance of contributions, you will get a locked-in lump sum of your total defined contribution account. This lump sum includes what you paid into the pension plan plus what your employer paid into the plan on your behalf. It also includes investment gains or losses on this amount over the years. You can usually transfer this lump sum to a locked-in retirement account or life income fund, use it to purchase an annuity, or transfer it to the pension plan of your new employer. All of these transfer options fall under the concept of "portability." Under a defined contribution plan, portability is not usually restricted by age.
Transferring Pension Service Between Employers
If you move from one employer to another, you might be able to transfer your pensionable service to the pension plan of your new employer. Some employers, such as provincial, federal and municipal governments, have formal agreements called reciprocal transfer agreements. These agreements allow you to transfer your pension credits from your old employer's pension plan to your new employer's plan. They are in place to help employees transferring between similar plans, where there is frequent movement of employees from one employer to another.
Reciprocal transfer agreements most often provide for the transfer of the commuted value of your defined benefit pension. The commuted value calculated under a reciprocal transfer is usually greater than the termination value paid to you if you had elected a transfer to a locked-in retirement account. Agreements may also be in place for transfers of defined contribution benefits as well. The amount transferred is used to purchase service under your new employer's pension plan.
Benefits of transferring pension credits rather than taking the commuted value of the pension:
- The service that you have purchased under your new plan might allow you to retire earlier and/or provide a better pension.
- The pension plan assumes the investment risk. If you take the lump sum and invest it yourself, you assume the investment risk.
- The commuted value of your pension calculated under a reciprocal transfer agreement is generally higher than the commuted value of a lump sum payment.
If you are changing employers, ask about any reciprocal transfer agreements your current employer might have in place and with whom.
What does "locked-in" mean?
Locking-in is a requirement of the Pension Benefits Act. It ensures that funds contributed to pension plans are saved to give you a retirement income, even if your membership in the pension plan ends. Your pension benefits must be locked-in after two years of membership in the plan. Your pension plan may lock in your benefits even earlier. Generally, locking-in coincides with vesting, which is your right to receive the benefit you have earned in the pension plan. If you are vested immediately in your pension plan, then your benefit may be locked-in immediately too. Pension funds that are locked-in under the Pension Benefits Act may be transferred to either a locked-in retirement account or a life income fund. The restrictions to the use of the funds that applied in the pension plan continue to apply upon transfer out of a pension plan.
If your pension benefit has been divided between you and your former spouse or common-law partner, locking-in still applies.
Pension funds are given special protection under the Pension Benefits Act. Locked-in pension funds cannot be used as collateral for loans, nor can they be seized by creditors.
Exceptions to locking-in under your pension plan
Small amounts of pension benefits do not have to be locked in. Your plan administrator will determine if your benefit can be unlocked because it is a small amount. The Pension Benefits Act permits unlocking if your benefit meets certain criteria.
For example:
If you terminate employment in 2006, your benefit can be unlocked if it has a value less than $4,210, or if it will provide you with a pension of less than $1,684 per year starting at age 65.
Your pension plan may also unlock benefits if your life expectancy is considerably shortened, but it is not required to do so.
Exceptions to locking-in for a locked-in retirement account or a life income fund
Exception 1 - Age 65 and Small Total Entitlement
A person age 65 or older may unlock locked-in pension funds if the sum of their entitlements in every locked-in retirement account, life income fund or defined contribution pension plan subject to pension legislation is less than 40 per cent of the year's maximum pensionable earnings under the Canada Pension Plan. In 2006, amounts under $16,840 could be unlocked.
If you qualify under this provision, you may transfer the money to a registered retirement savings plan or receive it as a cash lump sum. Any lump sums withdrawn are fully taxable in the year in which they are withdrawn.
To make a transfer or receive a lump sum under this provision, complete Form 1 (PDF: 10k): "Application to a Financial Institution to Withdraw Money from a LIRA or LIF at age 65". You must file a copy of the form with each relevant financial institution.
Exception 2 - Unlocking for Considerably Shortened Life Expectancy
Your locked-in retirement account or life income fund contract may contain a provision allowing for the withdrawal of a lump sum of locked-in pension benefits due to shortened life expectancy. To unlock your entitlement under this provision, a physician must certify that, due to a mental or physical disability, your life expectancy is likely to be shortened considerably. To unlock funds under these circumstances, complete Form 11 (PDF: 16k): "Application to a Financial Institution to Withdraw Money from a LIRA or LIF because of shortened life expectancy".
No other exceptions allowed.
The Pension Benefits Act does not give the Superintendent of Pensions any special powers to override the legislation. There is no provision for unlocking due to financial hardship. There are no exceptions to the locking-in requirements for persons who have permanently left Canada.
Wind-Up of Your Pension Plan
Your pension plan might wind-up for a variety of reasons. Your employer might go out of business, close a plant in a particular location, or choose to offer a Group RRSP instead of a pension plan. Whatever the reason, the wind-up process is subject to requirements under the Pension Benefits Act and Regulations.
When your plan is winding up, you will get notice from your employer or plan administrator. They will tell you the proposed effective date of the wind-up and that you will be receiving a wind-up statement of your benefits. If the plan is contributory, the effective date of a wind must not occur before employee contributions to the pension plan cease.
If you have a defined benefit pension plan and that plan is not fully funded, your benefits will be reduced to the amount that can be provided by the assets of the pension plan fund.
Your employer must file a wind-up report within six months of the effective date of the wind-up to the Superintendent of Pensions. The Superintendent reviews the report. Once the Superintendent approves the wind-up, your employer has 60 days to give you a statement of your wind-up benefits. Pensions will continue to be paid during the wind-up, and pensions may also commence during this period.
If you are not receiving a pension from the plan at the date of wind-up, your wind-up benefit will be determined as if you had terminated your employment on the wind-up date. Your wind-up benefit will differ from a termination benefit in the following ways:
- Your benefit will be immediately vested, even if you have less than two years of service;
- You will have portability rights, even if you are over age 55;
- If your plan is a defined benefit plan and the plan is not fully funded, your benefit might be reduced. If the plan has a surplus, your benefit might be increased.
You will be given 90 days in which to elect how you will receive your benefit. The plan administrator must comply with your election within 60 days of receipt of that election.
If you are a pensioner and your plan winds-up, an annuity will be purchased so that your pension continues in the same form that you elected. You will also be subject to a possible reduction in benefits if the plan is not fully funded at wind-up. You might share in any surplus if the plan is in a surplus position at wind-up.
Are there online retirement calculators?
Yes, this RRSP Calculator is a useful tool to estimate your retirement needs.
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