A reader suggested I expand on my post on converting RRSPs to RRIFs to include locked-in plans. So here it is.
Thank you, Frank.
What is a LIRA?
First, let’s review.
Employees enrolled in a registered pension plan who remain with their company until the prescribed retirement age will receive income for life from the pension. If you left the company prior to retirement, for whatever reason, you would have been given the option of taking your pension funds as a lump sum commuted value of the plan.
This sum was required to be deposited into a LIRA (Locked-in Retirement Account) or LRSP (Locked-in Retirement Savings Plan). These plans have unique regulations specified by the pension legislation of a specific province, or federally, and are designed to provide the same benefit as the original pension plan.
Different provinces have different names for their plans, but for simplicity I’ll refer to LIRA and LIF.
Converting your LIRA into retirement income
In many ways converting a LIRA to a LIF is similar to switching a RRSP to a RRIF, but there are some differences.
You may do the conversion as early as age 50 (Alberta), but by the year you turn 71, you must convert your LIRA into one of:
- A life annuity. This is the closest resemblance to receiving monthly pension income. The annuity provides you with a regular, specific payment for life. The amount paid will depend on the terms of the contract and includes such things as your age, current interest rates, and the amount you have to invest. The standard form of payment is a 60% joint and survivor annuity.
- LIF (Life Income Fund) or LRIF (Locked-in Retirement Income Fund – ON, MB, NFLD) or RLIF (Restricted Locked-in Income Fund – Fed). These offer a more flexible alternative to a life annuity and give you more control over your investments. You must withdraw a minimum amount based on the Income Tax Act rules (similar to a RRIF) but your withdrawals are also subject to a maximum amount. In Newfoundland, a LIF must be converted to a life annuity at age 80.
- PRRIF (Prescribed Registered Retirement Income Fund). This account most closely resembles a RRIF in that you must withdraw a minimum amount, but there are no maximums. They are only available in Manitoba and Saskatchewan. Your spouse is automatically named as beneficiary, but may sign a waiver allowing you to designate a different beneficiary.
Unlocking 50% of LIRA funds
Recognizing the need for some flexibility, a fairly recent feature is the ability to withdraw, or transfer to a RRSP or RRIF, up to 50% of your LIRA at the time you convert it to a LIF.
Why would you want to do this?
A withdrawal may be a necessity if you have no other income, or maybe you want to pay off a large debt that’s hanging over your head. Just remember that the withdrawal will be taxed as regular income, so make sure it’s a worthwhile thing to do.
If the money is transferred to a RRSP or RRIF, there are no immediate tax consequences. The benefit of unlocking the funds is that you have more flexibility to withdraw money when you want/need it without being limited to the maximum amount. You may want more income in the early years of retirement, or if you retire before you are allowed to start collecting government benefits.
Personal circumstances will dictate whether or not this is beneficial for you. In most cases you’ll need your spouse’s consent.
If you have multiple LIRAs from several companies you’ve worked for, you can consolidate them into one LIF if the provincial legislation is the same. If they fall under different jurisdictions, B.C. and Newfoundland, for example, they will have to remain separate – remember each province/federal has different regulations.
To fully understand your choices, be sure to review your pension documentation well ahead of time so there are no surprises.
Make sure you understand the requirements associated with your LIRA and consider which option is likely to work best for your particular circumstances.