While it is less common these days for employment benefits to include a pension, many individuals still do have either a pension (not including the Canada Pension Plan, which is subject to its own rules and which is not the subject of this blog) or a locked-in retirement account (LIRA) which was created from former pension funds. While these funds, particularly LIRAs, tend to be thought of as if they are RRSPs or RRIFs, it is important to remember that the rights associated with them, including the right to designate a beneficiary, are not always the same.
In Canada, pensions rights under provincial and territorial jurisdiction are governed by fairly rigid statutory rules. Under Ontario pension legislation, surviving spouses generally have the right to receive either a survivor’s pension or a lump sum payable on the death of their spouse (or possibly a choice between the two, depending on the pension plan in question). As well, a surviving spouse’s rights take priority over the rights of any other individual who might otherwise be entitled to the pension proceeds, as well as over the beneficiaries or interested parties in the pension recipient’s estate. This “super-priority” applies regardless of the pension recipient’s wishes, and despite any beneficiary designation made by the pension recipient. When it comes to testamentary freedom, pensions restrict such rights in favour of spouses.
The same rules apply to a LIRA if it was funded by a former pension. LIRA funds usually do originate from pension funds, as this is typically how a person who is vested in a workplace pension must receive those funds when they leave that employer prior to retirement. As with pensions, LIRAs are subject to the same “super-priority” in favour of a surviving spouse, overriding any beneficiary designation. The fact that the spouses are in a second marriage or common law relationship, or were previously separated (assuming they reconciled), has no impact on this right. Only if the spouses were living separate and apart at the date of death will the surviving spouse’s rights be revoked.
Because of these legislative restrictions on how a pension or LIRA holder can deal with these funds, the planning options available in respect of pensions and LIRAs are limited. For example, a spouse cannot irrevocably waive their survivor’s right to a LIRA. Although they can make a waiver in writing during the original pension or LIRA holder’s lifetime, this waiver can always be revoked. The pension or LIRA holder can designate a beneficiary or beneficiaries of their pension or LIRA, but they cannot do so to override their surviving spouse’s rights.
Legislative restrictions like this are designed to protect pension holders and their surviving spouses from making ill-advised financial decisions or being subject to undue influence by others. However, they can have the effect of eliminating certain planning from being legally enforceable. For example, spouses in second marriages may wish to leave their pensions or LIRAs to their children from previous relationships, but a simple beneficiary designation or verbal agreement between the spouses will not legally accomplish this goal. Even entering into a binding settlement after the pension holder’s death or obtaining a court order to the contrary with the spouse’s full cooperation and independent legal advice will not change this outcome, as the financial institution or pension fund holding the LIRA or pension must follow the legislated rules and cannot deviate from them for any reason other than those set out in the statute. Further, under many plans, where no beneficiary has been designated and there is no surviving spouse, a minor or dependant adult child will be given priority over the estate of the deceased pension holder and will be entitled to receive the pension funds, in the case of an adult child if they meet the criteria for being a dependant. In this way, the rules act as a scheme to protect certain individuals, whether or not they require or even want this protection.
Pensions and LIRAs are two types of assets which are governed by strict rules, often unfamiliar to plan holders, and sometimes unwelcome to families, which require special thought and planning. Lack of expert advice and forethought may result in unwelcome surprises for beneficiaries, and unwelcome surprises can unfortunately lead to unexpected disputes and even litigation, regardless of the clarity of the rules involved. As with all complex areas of estate planning, it is the “unknown unknowns” that will turn a good plan bad.
The comments offered in this article are meant to be general in nature, are limited to the law of Ontario, Canada, and are not intended to provide legal or tax advice on any individual situation. Before taking any action involving your individual situation, you should seek legal advice to ensure it is appropriate to your personal circumstances.