LIRAs are designed for long-term pension planning
Accounts are subject to pension fund rules and regulations
If you’ve recently left a job that included a pension plan, you may be offered an opportunity to transfer your plan to a Locked-In Retirement Account (LIRA). This is a government registered plan in which your funds grow tax-free until you begin withdrawals at retirement. Because the plan is designed to provide an income stream at retirement, your funds generally cannot be accessed for other purposes, like buying a home or funding education, and must be kept in the plan until you retire.
LIRAs are offered by financial institutions, often insurance companies, and the investments in the plan are typically managed by professional investment managers. You may also open a self-directed LIRA at a bank or an independent brokerage, in which you control the investment decisions in the plan. Because LIRAs are treated much like registered pension plans, the rules are much tighter than for Registered Retirement Savings Plans, with only very limited options for withdrawals before plan maturity and very narrowly circumscribed rollover options when you retire.
The transfer of your company pension to a LIRA will not attract any tax effects, but your contribution to the LIRA is not tax deductible. However, the funds you transfer will be tax sheletered and will not attract any income tax until your begin withdrawals at retirement.
LIRA conversion options at retirement
At retirement, you can start receiving money from the LIRA by choosing one of three maturity options:
Convert to a Life Income Fund (LIF). This is similar to converting a Registered Retirement Savings Plan (RRSP) to a Registered Retirement Income Fund (RRIF). Like a RRIF, the funds in the LIF continue to grow in a tax-sheltered environment even as you withdraw a specified minimum amount of pension income. Minimum and maximum withdrawals are governed by provincial regulations. As with a RRIF, funds withdrawn from a LIF are subject to tax at your marginal rate.
In addition, you continue to control how to invest the funds in your plan, allowing you to optimize your portfolio for your risk tolerance and investment objectives, so that your LIF works in harmony with your overall financial plan.
Purchase a life annuity. You may use some or all of the funds in your LIF to buy a life annuity, usually from an insurance company, which guarantees a fixed monthly income. The downside is that the rate is typically fixed, you have no control over how the annuity is invested, and the annuity is cancelled upon your death; the insurance company keeps whatever is left of the original investment, and your estate receives nothing more..
You must convert your LIRA by December 31 of the year in which you turn 71. The earliest that you can purchase a LIF is around age 55, but it could be earlier depending upon the retirement age specified in the terms of the pension plan.
Under some circumstances, and depending on the province of residence, funds may be withdrawn early from locked-in plans, for example, to pay for medical expenses, accommodation, or retrofitting your residence due to an illness or disability. Funds may also be withdrawn in cases of shortened life expectancy or becoming a non-resident of Canada.
Locked-in plans can also be accessed in certain cases of financial hardship. In Ontario, for example, there are four categories of financial hardship: 1) low expected income; 2) payment of first and last months’ rent; 3) arrears of rent or debt secured on a principal residence (such as a mortgage); and 4) medical expenses. The financial institution that administers your locked-in accounts will review your application to determine if it meets the requirements and if it approves, will make the payment.
Get more advice and information
Because the rules for locked-in accounts vary from province to province and can get quite complicated, it’s best to contact your pension administrator and ask them directly about your account. They will be able to tell you when you can start to withdraw money under your plan. Then consult a qualified financial advisor for rollover options that work best in your financial circumstances.
Robyn Thompson, CFP, CIM, FCSI, is the founder of Castlemark Wealth Management, a boutique financial advisory firm specializing in wealth management for high net worth individuals and families. Contact her directly by phone at 416-828-7159, or by email at firstname.lastname@example.org for a confidential planning consultation.
Notes and Disclaimer
Content copyright © 2022 by Robyn K. Thompson. All rights reserved. Reproduction in whole or in part by any means without prior written permission is prohibited.
The foregoing is for general information purposes only and is the opinion of the writer. Securities mentioned are illustrative only and carry risk of loss. No guarantee of investment performance is made or implied. It is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice. Please contact the author to discuss your particular circumstances.