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Pension prison: Adviser guidance may lock up your money

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Veronica Walsh is a retiree facing a money crunch. It's not that the former social worker has no pension or other savings, but she finds herself living on a restricted budget because she's been unable to access most of her money, which sits in a Life Income Fund (LIF).

"I am living on very limited income," says the 62-year-old who has two university degrees, who now collects discarded beer bottles and cans for additional income.

Walsh says she has plenty of money that could help her make ends meet until she can collect OAS in three years. One account has more than $50,000, but it's held inside a LIF.

"Since 2009, I have been fighting to get access to my money," she says. "There are so many roadblocks, rules, regulations and obstacles that I receive only a small amount of money for a year."

Manitoba's pension regulations put limits on how much pensioners can withdraw from LIFs.

These income funds are similar to a RRIF (Registered Retirement Income Fund), only instead of an RRSP converting to a RIF, it's generally a LIRA (Locked-In Retirement Account) -- pension plan funds from a former employer -- that converts to a LIF.

Walsh says she understands the rules -- now -- and she's taken advantage of every provision possible to access her funds. But the restrictions on LIF withdrawals are causing her financial hardship.

"I made many of the sacrifices necessary to put money aside for retirement, but when I need my money -- my money -- I had no security," she says, adding she was forced into retirement after losing her job 10 years ago and hasn't been able to find steady work since.

Provincial LIF rules changed in 2010, making these funds easier for pensioners to manage. Still, Walsh says it's increasingly difficult for the average person to fully understand the implications of the decisions regarding LIFs.

Debbie Lyon, superintendent of pensions with Manitoba Family Services and Labour, says the Office of the Superintendent often fields calls from pensioners inquiring about LIF rules.

"Legislation changed to make LIFs more flexible," she says about the rule changes two years ago.

"Rather than having two different income-producing vehicles and having to transfer back and forth to produce income, the legislation changed where the LIF provided the return that was the greater of the previous year's investment return or the long-term bond yield."

For Walsh, the new rules mean she receives at most a few thousand dollars a year from her LIF -- not enough to cover monthly expenses.

Lyon says pensioners also can unlock a portion of their locked-in money at age 55.

"They can unlock up to 50 per cent of the balance in one or more of their Life Income Funds, and transfer the balance to a credit proof RIF or what we call a prescribed RIF (Retirement Income Fund)," she says, adding three other provisions also can unlock LIF monies.

Walsh says she already unlocked 50 per cent of her LIF a few years ago and it was invested in a segregated mutual fund -- in the same fund as her locked-in LIF.

But for about three years she couldn't access her unlocked money as she needed because it was invested in Great-West Life's Real Estate Fund, which suspended redemptions in late 2008 until last year.


The insurance firm halted withdrawals because too many investors requested redemptions and the fund would have had to sell its properties at deep losses, which would have caused its unit price to plummet, threatening all investors in the fund.

Walsh has received payment now from the unlocked fund, but she says she was completely surprised by the suspension because her adviser had assured her it was a stable fund that would always provide her access to her money.

"After the moratorium was placed on this fund, I was told by GWL that the Real Estate Fund was meant to be a long-term investment option," she says.

Scott Moore, deputy superintendent of insurance for the Province of Manitoba, says the fund's prospectus states redemptions could be suspended if required. But he also says Walsh could have possibly received unsuitable advice.

"For advisers selling the product, it would be incumbent upon them to do their due diligence to make sure the product fits the consumer," says Moore, whose department regulates insurers in the province.

Segregated mutual fund investors like Walsh who believe they were advised to buy a fund that did not suit their needs can lodge a complaint with the Insurance Council of Manitoba.

"The Insurance Council can render a disciplinary decision in terms of conduct of the agent, but does that change the circumstances? Does that person then have the ability to redeem his or her funds? "No," Moore says.

Walsh says she lodged a complaint.

"When I went to the regulatory body for insurance companies, they said my adviser didn't do anything wrong," she says.

"They say, 'You have to read your contract,' but realistically, how many people who getting into a pension plan are going to read all of the rules?"

The head of one of Canada's largest non-profit debt and financial counselling agencies says Walsh raises an important point.

"I find with contracts regarding finances that most people don't understand them," says Scott Hannah, president of the Credit Counselling Society.

"Certainly with pensions, investments and their regulations, the quantities of paperwork are just incredible."

Often consumers sign on the dotted line and hope for the best assuming the professional across the desk is providing sage advice. He says most advisers look out for clients. Still, clients may be reticent to ask questions because they're embarrassed. Or neither the adviser nor client may recognize that a potential problem should be addressed.

Hannah also says another problem is new retirees are facing these complex issues more often than before because fewer have defined benefit pensions that pay a guaranteed income for life. "Those employees who are fortunate enough to have a defined benefit pension are at a huge advantage financially to everyone else," he says.

Now the norm is defined contribution pensions or just as likely LIRAs -- like Walsh has -- which often provide less retirement income and transfer much of the risk from the pension provider to the pensioner.

Walsh says she realizes she has few options now, and she is in a federal job retraining program to broaden her work prospects.

But the whole ordeal has her questioning who regulation protects in Manitoba: the little guy or the big firms?

"There are many boards, regulatory committees and commissions, but there's nobody to help the citizens," she says.

Lyon says pension regulations aim to be beneficial to all involved parties because they're developed in consultation with industry, the public and other stakeholders.

"All views are seriously considered," she says, adding the rules try to strike a balance between individuals who need access to their funds today and providing retired employees with a lifetime income.

Unfortunately for Walsh, she now finds herself struggling financially in part because of those rules that were designed to protect people just like her.

What is a LIF?

A life income fund is often created when an owner of a locked-in retirement account (LIRA) begins drawing income from the account. LIRA owners are former employees with a company and they were once paying into a defined contribution pension plan or group RRSP. Once they stop contributing, they often have the option to remain with the plan or transfer it to their control in a LIRA. It's money that can't be accessed until they retire -- hence the 'locked-in' moniker. Once LIRA owners retire, they can unlock a portion of those funds to use for whatever purpose, but the remainder is invested in a LIF, which they still control. Assets within the LIF can be invested in most investments from GICs and mutual funds to bonds and stocks. Once invested in a LIF, maximum and minimum annual withdrawal rules apply.


Calculating the minimum LIF withdrawal

The minimum withdrawal amount is based on the minimum for Registered Retirement Income Funds (RRIF) under the Income Tax Act, provincial rules state. Like RIFs, the minimum annual withdrawal at age 71 -- when the withdrawal in mandatory -- is 7.38 per cent of the assets in the fund. The minimum increases as the recipient ages. Before age 71, the minimum withdrawal is calculated by dividing one by the difference of your age from 90. At age 65, that's about four per cent of assets so, for example, on a $100,000 LIF, a 65-year-old retiree would receive $4,000 a year (1 [90-65] four per cent).



Calculating the maximum

LIF maximum withdrawals are based on the greater of the two following calculations: the previous year's return for investments in the LIF or the long-term bond yield.


LIF unlocking provisions

Four provisions allow individuals with LIFs to unlock a portion or all of their funds:

-- At age 55, they can unlock up to 50 per cent of their funds and invest that money into a credit-proof PRIF with financial institution. Credit-proof means -- like the LIF -- it can't be assigned, attached or seized by creditors, but funds can be attached to satisfy Family Property Act claims and maintenance orders.

-- Individuals with shortened life expectancy of less than two years can unlock funds in their LIF.

-- If you are no longer Canadian citizens, according to the Income Tax Act, you can also unlock your LIF.

-- Very small LIFs can also be unlocked. How small? That is based on a calculation, too, says Debbie Lyon, superintendent of pensions with the province. If you're under 65, you add six per cent of the balance of your locked-in funds to your current balance for each year up to 65. If that total is less than 40 per cent of yearly maximum pensionable earnings (YMPE), it's considered small enough to be unlocked.

"For example, John is age 55 on December 31 of the year he applies to his financial institution for a withdrawal." The balance of all of his LIRAs and LIFs is $5,000. "Six-per-cent interest is added annually to this balance from age 55 to age 65."

The balance with interest is $8,954.25. "For 2012, 40 per cent of the YMPE is $20,040," she says. Because John's lock-in funds with interest are $8,954.25, which is less than $20,040, his funds can be unlocked and paid to him as a lump sum.

Republished from the Winnipeg Free Press print edition June 16, 2012 B11

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