If you are in a registered pension plan with your employer and leave that company, or if you are laid off, your pension will be transferred into a Locked-In Retirement Account (LIRA). Locked-In Retirement Accounts are sometimes referred to as the more appropriate name of Locked-In Retirement Savings Plans (LRSP).
What are locked-in accounts?
Locked in accounts are simply money that originates from a pension plan. As long as you are employed by a company or organization with a pension, your money stays in that pension. There are two kinds of pension plans – defined benefit plans and defined contribution plans.
But when you leave that company, you may have the choice to move the money into a personal plan. Many people assume you can move pension money into an RRSP but that can only happen if it is a relatively small amount of money.
What is a LIRA?
It's important to understand that a locked-in plan is like an RRSP, but it has specific restrictions. You will need to understand the restrictions associated with a LIRA account if you want to avoid running afoul of regulation, and if you want to make the best possible decisions with your retirement account.
A LIRA is a Locked-In Retirement Account and is designed for accumulation of pension money outside a pension plan. If you do not need income from your pension funds, then a LIRA allows you to manage your pension funds personally. A LIRA is just another type of registered account much like an RRSP. Think of them both as ‘buckets’ of money. The two main differences between a LIRA and an RRSP are:
- LIRAs hold pension money. RRSPs hold money that you have contributed on your own. Because Locked-In Retirement Accounts hold pension money, you cannot just contribute money to a LIRA. The money has to be transferred in from a pension.
- With RRSPs, you can take money out whenever you want and there are no restrictions on how much money you can take out. Although it may not be ideal, you can cash out all of your RRSPs at once. With LIRAs, you are restricted on withdrawals. Firstly, you cannot take out lump sum withdrawals out of a Locked-in Retirement Account hence why they are called ‘Locked-in’. If you want income, you must move the money into a LIF or Life Annuity, which I will discuss later.
Other than these differences, RRSPs and LIRAs are very similar.
How a LIRA works
Once a plan is converted to a Locked-In Retirement Account, you cannot make further contributions to it. You are not allowed to make withdrawals from the account. Unlike the “regular” RRSP, which allows for withdrawals, you cannot take money out of a locked-in account. Instead, you are required to convert your LIRA into another type of account that can provide you with the income you need in retirement.
Once you reach retirement or turn 71 you are required to convert your LIRA to either a life annuity, Life Income Fund (LIF), Locked-In Retirement Income Fund (LRIF) or a Prescribed Registered Retirement Income Fund (PRRIF). Here is a quick look at these options:
- Life annuity: You purchase a life annuity from an insurance company, and, in return, you receive regular periodic payments for life. The payment you receive depends on your current age, how much you use to purchase the annuity, current interest rates, and other factors. You don't have control over the investments involved, but you are guaranteed a specific payment on a regular basis.
- LIF: You can control the investments in your account, but your withdrawals are subject to minimum and maximum annual amounts.
- LRIF: Available only in Ontario. Like the LIF, you can decide how to invest your money. This fund is also subject to annual minimum and maximum withdrawal amounts each year.
- PRRIF: Available only in Manitoba and Saskatchewan. There are no minimum or maximum withdrawal requirements with this option. It is the most flexible of choices when it comes to your locked-in retirement account. However, realize that you don't get a pension tax credit for the income in a PRRIF until you are 65. So, if you retire early, you don't get that advantage.
There are some exceptions that might allow you to access the money in your Locked-In Retirement Account before retirement. While the rules can vary from province to province, generally they include reduced life expectancy, unemployment or low income, balances below a certain amount, and those that will become a non-resident of Canada.
Make sure you understand the requirements associated with a LIRA and consider which conversion option is likely to work best in your particular circumstances.
What is a LIF?
When you eventually need to move from the accumulation phase in life to the income phase, a Life Income Fund (LIF) is one of the options for income. A LIF is used to convert LIRA money to income just like an RRIF is used to convert RRSPs to income. Just like the LIRA has similarities to the RRSP, the LIF has a lot of similarities to the RRIF.
- A Life Income Fund is designed to create regular income. If we used the bucket analogy, the LIF and the RRIF are just buckets with holes in them.
- In both cases, there is a minimum income that must come out of the plan.
- Income is only taxed when you receive income.
- In both the RRIF and the LIF, you can invest in many different types of investments like GICs, bonds, mutual funds, stocks, etc.
The big difference between the LIF and an RRIF is that the LIF not only has a minimum income but also a maximum income that prevents you from spending the money too quickly.
Protecting your retirement
While a Locked-In Retirement Account has many restrictions, it could help to protect the pensions of those who change careers a few times throughout their life. It's one way to ensure you get the money you are entitled to.