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The rules for cashing out or “unlocking” small amounts in Ontario pensions were overhauled last July, but not all pensioners with a small pension will receive the same treatment.
Before the changes, a small pension was considered to be one where in 2012 the employee’s annual pension was less than $1,002 (2 per cent of the Canada Pension Plan yearly maximum pensionable earnings of $50,100).
The amended definition of a small pension refers to either an annual benefit of $2,004 (4 per cent of the 2012 YMPE of $50,100) or a pension where the lump sum value of the benefit does not exceed $10,020 (20 per cent of $50,100).
However, a pension plan administrator can only pay out the new, higher small benefit maximums if the plan documents allow unlocking of small benefits and if they have been amended to incorporate the higher amounts.
In other words, even if your benefit is under $2,004 in 2012, if your former employer has not updated the plan language you will only be eligible to pull out your lump sum if the annual benefit is under $1,002 (the old limit).
There is no legal requirement that plan sponsors unlock small amounts or update their plans. However pension lawyers and consultants are encouraging employers to make necessary plan changes to simplify matters for both administrators and plan members with small pensions who want to cash out.
Another wrinkle is that if you left the employer sponsoring the pension plan before 2012 if you retired, or were fired, the new benefit maximum will apply, but the calculation must be based on the YMPE in the year you left.
For example, assume you left the company in 2010 when the YMPE was $47,200. If you apply today to cash out a small benefit, you will only qualify if the annual pension is less than $1,888 (4 per cent of $47,200) or the lump sum value of the benefit is less than $9,440.
A different set of rules applies if you need to withdraw pension funds due to financial hardship.
If you are entitled to payment of a small amount, you may request that it be paid into a registered retirement savings plan or a registered retirement income fund where it will continue to be tax sheltered. Otherwise you will have to pay tax on the lump sum withdrawn.