If you’ve ever left a job where you were part of a company pension plan, you’ve likely encountered the term Locked-In Retirement Account or LIRA. It is a specific type of registered savings plan in Canada designed to hold and grow the pension funds you’ve accumulated.
This guide will explain what is a LIRA, how it works, its benefits and drawbacks, and the crucial rules you need to know for managing these funds.
What is a Locked-In Retirement Account?
A Locked-In Retirement Account, or a LIRA, is a retirement savings account used to hold locked-in pension assets from a former employer’s pension plan in Canada. The money in a LIRA is “locked-in”, meaning it cannot be withdrawn in cash before retirement age except under special circumstances.
The locked-in rules are what set LIRAs apart from these other options. Unlike Registered Retirement Savings Plans (RRSPs), which allow contributions over time and withdrawals at any age, LIRAs have restrictions on contributions and withdrawals. The primary goal of these rules is to ensure that these pension assets provide a source of income throughout your retirement years.
LIRAs are regulated provincially, so the specific rules for unlocking, withdrawals, and retirement income options can vary across Canada. But in all cases, the purpose is to ensure pension savings are preserved for retirement income.
Contribute and Transfer Funds into a LIRA
The only contribution to a LIRA is the initial transfer of funds from your former workplace pension plan. You cannot make additional contributions over time as you would to an RRSP. In some cases, transferring funds from another LIRA or locked-in account directly to your new LIRA may be permitted, depending on provincial regulations.
The amount that can be transferred is based on the commuted (lump-sum) value of your pension entitlement plus any excess contributions you made. Any pension funds above the maximum transferable amount must be taken in cash and taxed appropriately.
Your former employer may charge a processing fee that is deducted before the transfer, reducing the LIRA contribution amount.
What Happens to Your LIRA by Age 71?
You must wind down your LIRA by December 31st of the year you turn 71. You cannot keep it as a LIRA beyond this date. Your primary options are to convert the funds into a retirement income vehicle.
Transfer to a Life Income Fund (LIF)
A LIF is the most common option. It is a type of Registered Retirement Income Fund (RRIF) explicitly designed for locked-in funds.
A LIF has a required minimum annual withdrawal (like a Registered Retirement Income Fund) but also an annual maximum withdrawal amount. This maximum is designed to prevent you from depleting your pension funds too quickly.
Transfer to a Locked-in Retirement Income Fund (LRIF)
An LRIF is similar to a LIF but is only available in certain provinces, such as Newfoundland and Labrador. The key difference often lies in how the maximum annual withdrawal is calculated. In some cases, there is no maximum withdrawal limit, offering more flexibility than a LIF. Due to their limited availability, it’s essential to confirm if this is an option under your LIRA’s governing legislation.
Purchase a Life Annuity
You can use your LIRA funds to purchase a life annuity from an insurance company. This provides a guaranteed, regular payment for the rest of your life (or for a specified period). This option trades investment control and flexibility for the security of a predictable income stream.
Transfer to an RRSP
In some pension jurisdictions, you may be able to transfer LIRA funds to an RRSP. Doing so provides added flexibility for withdrawals but reduces future tax-deferred space for regular RRSP contributions.
Your maximum RRSP limit is reduced by the amount transferred from the LIRA. Consider whether you expect to need that room for future RRSP contributions.
What Are the Rules of Withdrawing Funds From a LIRA?
LIRA funds cannot be withdrawn as cash before the age of 55, though this varies by jurisdiction. Many, but not all, jurisdictions offer a one-time option to unlock up to 50% of your LIRA funds once you reach age 55. The unlocked portion can typically be withdrawn as cash (which is taxable) or transferred to an RRSP or RRIF, where it remains tax-sheltered but is no longer locked in. It is crucial to check the specific rules for your LIRA’s jurisdiction before assuming this option is available.
Some provinces allow you to unlock more than 50% of your LIRA at age 65 or later. For example, in Saskatchewan, Alberta, and Manitoba, 100% of LIRA funds can be unlocked at age 65 and withdrawn or transferred as you choose.
Quebec, British Columbia, and other jurisdictions still restrict full cash withdrawals until actual retirement despite age 65 eligibility.
Early Withdrawal and Unlocking Provisions
While the primary rule is that LIRA funds are locked in, some exceptions allow for early access. These are strictly regulated and vary by jurisdiction.
Common exceptions for early unlocking are:
- Financial hardship: You may be able to unlock funds if you are facing severe financial difficulties, such as low income, risk of eviction due to rent or mortgage arrears, or high medical expenses. Each province has its own definition and application process for financial hardship.
- Shortened life expectancy: If a physician certifies that you have a terminal illness or a disability that significantly reduces your life expectancy (often to less than two years), you may be permitted to withdraw the full amount.
- Non-residency in Canada: If you have been a non-resident of Canada for at least two taxation years, you may be able to unlock your LIRA funds, which will be subject to withholding tax.
- Small balance LIRAs: If the total value of your LIRA is below a certain threshold, you may be allowed to unlock the full amount. For example, in Ontario, if you are 55 or older and the balance is less than 40% of the Year’s Maximum Pensionable Earnings (YMPE), you may qualify.
- Marriage breakdown: A LIRA may be divided or unlocked as part of a divorce or separation agreement.
If you pass away before withdrawing your LIRA, a surviving spouse or named beneficiary may be eligible to receive proceeds, depending on specific provincial regulations.
Why Should You Open a LIRA?
There are five benefits that make opening a LIRA advantageous compared to cashing out your pension or leaving it with your former employer:
- Tax-deferred growth: Keeping pension assets in a LIRA allows for tax-sheltered growth, maximizing their potential value for retirement.
- Investment control: You can open a LIRA at any financial institution and direct your own investments (e.g., stocks, bonds, GICs, mutual funds). This gives you control over the investments compared to leaving your pension with a former employer.
- Creditor protection: Funds held within a LIRA are generally protected from creditors in the event of bankruptcy or legal action. This preserves pension savings for your retirement income regardless of any debts or liabilities.
- Independence from former employer: With a LIRA, your retirement funds are no longer tied to the financial health or decisions of your previous employer. You retain control of the account, regardless of your former employer’s situation.
- Forced retirement savings: The locked-in rules prevent full withdrawals from a LIRA before retirement age, except in extenuating circumstances. This helps prevent pension savings from being spent frivolously or drawn down too quickly.
What Are The Downsides of a LIRA?
The locked-in rules that provide benefits also create four limitations to weigh:
- No access to funds before retirement – Except in special cases, LIRA funds cannot be withdrawn before age 55, limiting flexibility.
- Account fees – Financial institutions may charge higher fees for LIRAs compared to RRSPs to offset administrative costs.
- Complex provincial regulations – Rules can vary across jurisdictions, making LIRAs more complex than national standard RRSP rules.
- Mandatory conversions at age 71 – Funds cannot remain indefinitely tax-sheltered and must be converted to an income stream by the end of the year you turn 71.
For many, however, the tax-deferral benefits and creditor protection outweigh the drawbacks. LIRAs provide security for retirement savings from pension plans.
How to Open and Contribute to a LIRA
If you have pension funds available for transfer, here is how to open and contribute to a LIRA:
Choose a LIRA Provider
Select a financial institution for your LIRA based on the following:
- Investment options and account flexibility
- Fees charged and account minimums
- Customer service standards
- Tools and resources provided
Banks, credit unions, brokerages, insurance companies, or financial advisors can all offer LIRAs. Compare options to find the best fit.
Open a LIRA Account
Complete an application to open a LIRA with your selected provider. You may need to provide personal information, details on your former pension, and proof of age.
Providers are required to ensure you qualify and understand LIRA rules before opening an account.
Request your Pension Plan Statement
Contact your former employer’s pension plan administrator to request a statement showing the value of your pension entitlement. This commuted (lump-sum) value will determine the potential LIRA contribution amount.
Statements may only be calculable as of a specific date, which must be less than 180 days before the transfer.
Request a Pension Transfer Estimate
Ask your pension administrator for an estimate of the amount that can be transferred to a LIRA. This considers any fees, charges, or maximum transfer limits.
It will indicate if any portion may be paid in excess as a cashless withholding tax. Estimates are based on statements showing your entitlement value.
Complete Pension Transfer Forms
Once you have an estimate, complete the LIRA transfer direction forms required by your pension administrator and financial institution. Forms authorize the transfer of your eligible pension funds to the LIRA. Your spouse or common-law partner may need to provide consent.
Transfer the Funds to your LIRA
The pension administrator liquidates your pension entitlement, withholds any tax on amounts paid in excess, deducts applicable fees, and transfers the LIRA contribution amount. Timelines vary, but transfers generally occur within 2-3 weeks after completed paperwork is received.
Your financial institution invests the funds according to your instructions once received. Your LIRA is now funded and ready for you to grow your retirement savings.
Summary
LIRAs offer Canadians a way to keep their pension savings invested for retirement if they change jobs or leave an employer before the official retirement age. The locked-in account rules aim to ensure the funds are preserved over the long term.
With limits on contributions and withdrawals, LIRAs have unique regulations compared to RRSP accounts. However, LIRAs provide maintenance of pension savings’ tax-deferred status along with creditor protection.
Thoroughly weigh the pros and cons of LIRA features, investment options, provider fees, and your personal financial situation. When used strategically, LIRAs can optimize pension assets through tax-deferred growth for decades until retirement income is required. With proper decumulation, a LIRA can generate secure tax-efficient retirement income from pension funds for life.
FAQs about What is a LIRA in Canada
Can I contribute to a LIRA?
No, you cannot make new contributions to a LIRA. A LIRA can only accept funds transferred from a registered pension plan. No other deposits can be made. Additional contributions over time are not permitted, unlike with RRSPs.
What is the difference between a LIRA and an RRSP?
Both LIRAs and RRSPs are registered accounts that provide tax-deferred growth on retirement savings. The key differences are:
Contributions – LIRAs can only accept transferred-in pension funds, while RRSPs accept ongoing contributions up to your deduction limit.
Withdrawals – LIRAs cannot be withdrawn before retirement age except in special cases. RRSPs can be withdrawn from at any time, though taxes apply.
Origins of Funds – LIRAs hold funds originating from an employer pension plan. RRSPs hold contributions from yourself and/or your employer.
Mandatory Conversion – LIRAs must be converted to retirement income by age 71. RRSPs can continue indefinitely.
What happens if I leave Canada permanently?
Some provinces allow non-residents to unlock LIRA funds as cash upon permanently leaving Canada. Additional documentation and certification of non-residency are typically required. The withdrawal is taxed as income. Locked-in accounts may also be eligible for transfer to an equivalent tax-deferred account in your new country of residence.
Do LIRAs have contribution limits?
No, there are no CRA limits on the amount transferred into a LIRA, unlike RRSP contribution room limits. However, your former pension administrator will calculate a maximum transferable amount based on your plan's specific provisions. Any excess not transferred to the LIRA must be withdrawn in cash and taxed.
Can I transfer my LIRA to someone else?
Generally, LIRA funds cannot be transferred to another person except for a beneficiary inheriting LIRA proceeds after your death. In that case, a spouse beneficiary has the option to transfer inherited LIRA funds tax-deferred based on pension rules.
What happens to my LIRA if I die?
If you pass away before withdrawing the funds, your designated LIRA beneficiary will receive the proceeds. These are paid out tax-free to a surviving spouse beneficiary, who can transfer the funds to their RRSP or other registered plan. Alternate beneficiaries must withdraw the LIRA proceeds as taxable cash.
