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© Copyright 2000 Rogers Media. The following article first appeared in the August 2000 edition of
BENEFITS CANADA magazine.
Locking-in retirement plans
Locking-in group RRSPs ensures savings will be used for retirement.
By Steve Hesketh
Did you know over half of registered retirement savings plan (RRSP) withdrawals are made before age 45? And
that 75% of RRSP withdrawals are made before age 55? Canadians, in general, are short-term thinkers with
immediate wants that overpower long-term needs. We have been encouraged to dream of our ultimate retirement
lifestyle, but our withdrawal of retirement savings before retirement shows our lack of understanding on
how to turn our dreams into reality.
Employers and pension committees can effectively change this picture by embracing locking-in as a necessary
tool. Indeed, plan sponsors need to emphasize the clear objective of funding retirement and claim pride in
their commitment to that objective.
Some group RRSPs restrict withdrawals during employment to ensure the funds are saved. Under pension law,
locking-in goes beyond employment, requiring the accumulated funds to be invested until retirement, at
which time the funds must be converted to a pension. In other words, it cannot be taken as a lump sum of
cash at any time.
So why should an employer care?
Firstly, locking-in protects the money from financial mismanagement. Experience has taught us that if
company-funded retirement savings are not locked-in, employees will spend it. Hence the proliferation of
withdrawal restrictions in group RRSPs. In today's society of credit cards, lay-away plans and cash
advances, we are more in debt than ever before. Our commitment to long-term savings is constantly under
siege from our immediate wants.
Second, locking-in guarantees the money will be used for retirement income. We are living longer and
retiring earlier. Our concept of retirement is evolving. Old Age Security and the Canada Pension Plan are
inadequate for most Canadians, hence the popularity of employer retirement plans and individual RRSPs.
People with savings at retirement have choices. We don't need any help spending our money--we need help
saving it and leaving it. Locking-in achieves that.
Third, in most cases, locking-in provides for maximum tax relief. Retirement saving plans are tax
deductible and tax sheltered. Withdrawals are subject to income tax at the employee's marginal tax rate.
The basic premise is to contribute while earning highest income (earning years) and withdraw while earning
little or no income (non-earning years).
The government's tax system encourages retirement savings. Why then would Canadians withdraw their RRSPs
while still working? More importantly, why would an employer fund such a program?
The answers suggest Canadians do not have adequate savings elsewhere and lack an understanding of proper
financial planning. For the employer's part, they are often trying to encourage savings for retirement but
are reluctant to absolutely commit. Their indecision could ultimately be more important than any other
factor in determining the adequacy of employee's retirement savings.
Pensions are locked-in savings plans where the priority is to provide a retirement income. The natural
desire to accomodate employees' diverse financial plans is often at the expense of dignity in retirement.
In light of the need for retirement savings (and to borrow a phrase from Martha Stewart), locking-in is a
good thing.
Steve Hesketh is senior account executive, group retirement services with Great-West/London Life in
Vancouver.
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