Governments have rolled out emergency aid for Canadians struggling during the coronavirus pandemic, but you can’t help but wonder whether early access to retirement pensions is a viable solution.
Since March 20, the Australian government has granted early access to retirement pensions – and is expecting as much as $27 billion AUD ($24 billion CAD) to end up in the hands of 1.3 million workers who applied for early access
Canada and Australia share many commonalities, but the government pension programs are not applied equally.
Australia’s Superannuation pension funds function similar to a locked-in retirement account (LIRA) in Canada, which doesn’t permit withdrawals before retirement except under exceptional circumstances.
In a “Super,” an Australian employer must contribute 9.5 per cent of their employee’s typical wages into the fund while the employee can make optional contributions and get tax benefits for doing so. On the other hand, the Canada Pension Plan is a collective social security benefit for all Canadians jointly administered between the provinces.
“When it comes to the CPP, everything is pooled together and invested collectively, so it’s looking at successfully funding its commitments for the next 30, 40 or 50 years,” says David Field, a fee-only certified financial planner and retirement specialist who is offering a free course for people currently facing financial emergency. “So to solve a short-term crisis with a long-term focused benefit, I’d imagine it would hurt the overall system.”
You can opt into taking your CPP benefit at the age of 60 to get it slightly earlier now. You can also withdraw funds even earlier from your RRSP, but you may face up to a 30 per cent withholding tax depending on how much you take out. You could also be hit with an early withdrawal tax depending on your tax bracket and you would have to consider whether the withdrawal itself would put you in a higher tax bracket.
“If you keep bumping yourself up, it’s going to be taxable,” explains Field. “You need the money, but there will be a large tax consequence. Also, if someone is looking to take out a meaningful amount, a lot of that could be held as withholding tax.”
Another consequence of accessing your long-term investments like an RRSP during the pandemic – and a wildly swinging stock market – is you’ll have to sell more shares to get the dollar value you want. That can have consequences when the market recovers and you re-invest.
“You’re not going to recover back to where you were before. You’d be entering at the bottom of the market and your investment will have less value on reinvestment than it would if you just rode out the dip in the market, ” says Field.
Of course, the pandemic may have put you in a dire financial situation, so you may feel you have no other options. But it’s important to be aware of all the potential repercussions when you take out retirement savings early.
As for withdrawing from a LIRA early, the conditions depend on the province an employer is based in. Plus, a select few LIRAs are under federal jurisdiction.
“If you live in Ontario and the premier decides to relax the rules for accessing LIRAs, that would be good. But if your employer was in Quebec and they hadn’t made those changes, you still wouldn’t be able to access it, even if you lived in Ontario,” says Field.
In Ontario, a LIRA can be accessed once a year for one or a combination of the following reasons:
• Medical expenses
• Arrears on rent or debt secured on a principle residence
• First and last month’s rent
• Low expected income
But, as soon as a LIRA is accessed, it’s considered taxable income. A portion of it will be withheld and remitted to the Canada Revenue Agency. You may also have to pay withdrawal fees to your bank and the amount will no longer be protected from creditors.
Still, Nicholas Hui, an advice-only financial planner and money coach at Vave Financial Planning in Markham, believes it might be worth adjusting the rules and consequences due to the pandemic.
“Allowing people to have access to LIRA funds would be reasonable,” he says. “If this was done, perhaps there could be a re-payment requirement of say, five years or so. This would help Canadians with short-term and more immediate needs but allow for them to pay back into the LIRA so it would not affect retirement funds.”
“It is something to look at even though I mentioned those other complications,” agrees Field. “Ontario is a big province. There are a lot of companies based in Ontario so for a lot of people across Canada, it would be under the Ontario rules.”