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).
It's important to understand that that a locked-in plan is like an RRSP, but it it has specific restrictions. You will need to understand the restrictions associated with a LIRA if you want to avoid running afoul of regulation, and if you want to make the best possible decisions with your retirement account.
How a LIRA Works
LIRAs are similar to an RRSP, but as the name suggests, are locked-in until retirement. Once the 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 off 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 your 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: 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: 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.
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.