The federal government has introduced new regulations that would permit retirees to remove varying amounts of money each year from their defined contribution pension plans, meaning they can take more cash than is currently allowed as they reach later years of retirement.
The change has raised concerns that it could lead to pensioners withdrawing too much money and then facing hardship later, but others say the guidelines have caps that will limit withdrawals in early years of retirement.
The regulations were unveiled Friday and apply to defined contribution (DC) pension plans, which are savings plans that offer a varying benefit in retirement depending on the performance of assets in the plan, at organizations regulated under federal pension rules. That includes Crown corporations and private companies in federally-regulated sectors such as banking, telecommunications and transportation.
The variable withdrawals will not apply to traditional defined benefit plans, which pay a guaranteed annual benefit in retirement.
Under current rules, retiring DC plan members can use the money in their accounts to buy an annuity that pays fixed annual benefits, or they can transfer the funds into a savings vehicle such as a locked-in registered retirement savings plan, which has annual withdrawal limits.
The new rules would add an option for the pensioner to directly receive variable annual payments from the DC plan, which are subject to maximum caps that will vary depending on the account balance, age, and the current government bond yield.
Variable withdrawals can begin at age 55, and will require consent of a spouse, who would have to be informed that their pension income or survivor benefits in later years "may be significantly reduced" if the maximum amount is withdrawn each year, the rules say.
Pension expert Paul Forestell, a retirement practice leader at consulting firm Mercer, said the maximum withdrawal in early years is capped at levels similar to the amounts that would be paid out under an annuity, but the limits rise sharply as retirees enter their 80s. The maximum withdrawal hits 100 per cent of the pension assets by age 90.
Despite the cap in early years, Mr. Forestell said some investors may favour the option because they do not have to liquidate their accounts to buy an annuity. "Really what it's doing is allowing you to continue to invest," he said.
Lawyer Mitch Frazer, a pension expert at Torys LLP in Toronto, said the amendments may help some people who need more cash for medical expenses or other costs as they age. But he fears many people will take out their maximum withdrawals too early to fund discretionary purchases and end up with less in their final years.
"From a societal perspective, you've taken away a steady stream of income from people who may not necessarily be excellent at managing their money," he said.
The British government unveiled new rules this year that would allow far larger cash withdrawals from DC pension plans – even complete withdrawal of all cash in a single year for accounts worth less than £30,000 ($53,000). Canada's regulations are far more limited.
The federal government passed legislation allowing variable withdrawals in 2010, but has only now published the detailed regulations laying out how the system will work. The regulation amendments will be open for public comment for 30 days.