Article in the Kitchener Waterloo Record

PENSION PREDICAMENT
Locked-in pensions can block investors from accessing their own nest eggs
ROSE SIMONE





(Apr 21, 2007)
By the time Bill Nafziger retired after 37 years at Krug Inc. in Kitchener, he had a nice nest egg built up in his pension plan.

But three years later, at age 64, Nafziger, is fighting for the right to do what he wants with his own money.

The Milverton resident has joined CARP, also known as the Canada's Association for the 50-Plus, in lobbying the provincial government to give pensioners the right to withdraw money in what are commonly known as "locked-in" funds.

Locked-in pension funds are like regular RRSPs, but they are much more restrictive because they have maximums on how much money a person can withdraw.

With the principal in his defined contribution pension plan "locked in," Nafziger says he probably will die without being able to access the bulk of the pension money he worked for.

He adds that after he and his wife both die, whatever is left in the fund will to their estate and get taxed as revenue in one year, so the "tax man" will get a bigger bite of it.

"It's completely illogical," he says. "There is no reason why you shouldn't be able to unlock that money, and use it for yourself and your wife while you are living," Nafziger says.

No one knows how many people in Canada have money in locked-in accounts. The Financial Services Commission of Ontario, which is responsible for regulating pensions in this province, says it doesn't keep track of how many there are.

Jack Mintz, a University of Toronto business economics professor who himself has pension money in a locked-in fund from when he left Queens University, says it affects millions of people in Canada.

It includes people like Mintz who took their money out of a group pension plan when they went to work for another employer, as well as people like Nafziger who have individual pension plans rather than employer-administered group plans in which cheques are cut each month for retirees.

Under the financial services commission rules, if pension money isn't being managed by an employer pension fund, or by an insurance company that pays out a monthly income from a life annuity, it has to go into a "locked-in" account to provide a regular income over the years of retirement.

The amount a person can take out in each year after retirement is capped at a small percentage of what is in the fund. For example, at age 62, a person can take seven per cent of what's in the fund. That goes up gradually, to 11.9 per cent at age 79.

Nafziger says this means if he dies at around the age of 79, which is the age when the average Canadian man dies, two-thirds of his money would still be in the locked in fund.

As an industrial engineering manager at Krug, Nafziger tucked away more than $150,000 in his pension fund through personal and employer contributions over the years.

He knows he has to pay taxes on the money he takes out each year so he has no intention of withdrawing his entire retirement fund in one year.

But he says he should be able to enjoy more of the benefits of that money now that he is in a lower income tax bracket compared to when he worked for the office furniture manufacturer.
If the bulk of the money is left to his estate, governments will take a larger share of the funds in taxes, he says.

"If I die at the age of the average man in Ontario, there would still be about $100,000 left in that estate when it is unlocked," he says. "If I could take it out over the next 20 or 30 years in small amounts, I could realize a savings in income tax because I am taking it out at a lower income. But you are not allowed to take significant amounts all the way along."

CARP agrees with him. It is lobbying Ontario to follow the lead of Saskatchewan, which allows people to transfer all of their locked-in funds to registered retirement income funds that don't have maximum payout rules.

In its most recent budget, Ontario announced a provision, to take effect next year, that will allow for a "one time unlocking" of 25 per cent of the money in a locked-in fund.

Scott Blodgett, a spokesperson for the Ontario Ministry of Finance, says the government is trying to "balance the twin goals" of giving seniors more flexibility while still ensuring that there is a steady stream of income through retirement.

In doing that, Ontario will become one of four provinces that allows partial unlocking of funds, he says.

But Bill Gleberzon, a director of government relations for CARP, says that's not good enough.

"Our position is that this is an insult," he says.

The government's rationale for not allowing full unlocking appears to be based on the fear that pensioners will be irresponsible and spend all the money in one year, he says.

But Gleberzon says there is no evidence people would do that, and there is a huge tax penalty if they do.

"This is just outmoded paternalism that should not exist in the 21st century," he says.
Retirees can apply to the financial services commission to unlock their money for health reasons or financial hardship. But people who have more than $17,480 in locked-in accounts also have to pay the commission a fee of $200 to $600 if they succeed.

"So they have to pay to access their own money," Gleberzon says.

About 30,000 people applied to unlock their money between 2003 and 2006, and only 52 were turned down, says Gleberzon. If almost everyone who applies is allowed to unlock anyway, why should people have to go through this costly bureaucratic process in the first place, he says.

Gleberzon says CARP will continue to lobby the provincial government and make locked in pensions an election issue if necessary.

He says it is particularly galling to pensioners who are lobbying for unlocking that in 1999, the Mike Harris-led provincial government passed legislation that allowed 61 MPPs to unlock their pensions early and roll their money into RRSPs.

Gleberzon stresses that it is a matter of giving people access to their own money.

Nafziger agrees. "It's our money. It should be our decision what to do with it, not the government's decision."

rsimone@therecord.com

((((There needs to be a correction where it states)))) " But people who have (((more))) than $17,480 in locked-in accounts "It should read.Retirees can apply to the financial services commission to unlock their money for health reasons or financial hardship. But people who have (((less))) than $17,480. or do not have a income of more then $29,133. in locked-in accounts also have to pay the commission a fee of $200 to $600 if they succeed