Investment Facts: Locked-in Accounts (LIRA, LIF)

Investor Education Series Part 1

During the mid-1980’s there was considerable reform occurring within the Pension Benefit Act (PBA). In particular, areas of transfer-ability options and commuted values paved the way for the transfer of pension savings to locked-in accounts in Ontario. Effective January 1, 1988 if an employee terminates their employment or elects not to be a member of their pension plan; those entitled to a deferred pension plan can require the administrator to pay an amount equal to the commuted value of the deferred pension into an approved retirement savings arrangement; otherwise known as a LIRA[i].

Beforehand, if members of a pension plan left their employer or plan membership, their only option was to leave the accrued benefit at their former employer’s pension fund. At retirement, the individual was required to coordinate a payment schedule with the pension fund. The creation of locked-in accounts by the PBA has given individuals greater control over their retirement savings. Throughout the years locked-in accounts have evolved however, two primary goals still remain: to preserve the money for retirement and provide a lifetime stream of retirement income.

Investments transferred from an Ontario registered pension plan into a LIRA must remain "locked-in" and can only be used to provide retirement income. The key distinguishing feature of a LIRA from the regular (non-locked-in) RRSP is that money cannot be withdrawn from a LIRA except in special circumstances.

The exceptions include:

to a pension fund of a subsequent employers’ pension plan (in accordance with the PBA and regulation)
to another LIRA
to a Canadian insurance company for the purchase of an immediate or deferred life annuity;
to a Life Income Fund (LIF) or Locked-In Retirement Income Fund (LRIF) or
please note the above transfers out must be made on a tax deferred basis under the Canadian Income Tax Act
Special circumstances that provide special access to the locked-in money include[i]:
Financial hardship
Low expected income
Payment of first and last month’s rent
Arrears of rent or debt secured on a principal residence (such as a mortgage)
Medical expenses
Non-financial hardship
The plan holder’s life expectancy has been shortened to two years or less
The plan holder is at least 55 years old and the total value of the funds in all of the locked-in accounts is less than $21,000 (for applications in 2014)
amounts transferred into the locked-in account exceed federal Income Tax Act limits
the plan holder is a non-resident of Canada and 24 months have passed since the date of departure from Canada
after December 31, 2010, the plan holder transferred money into an Ontario LIF and within 60 days of this transfer, wanted to withdraw or transfer up to 50% of the total money that was transferred to the LIF

LIRA accounts can remain untouched up until a prescribed age; 31st day of December of the year in which the plan holder reaches 71. At this point in time, the LIRA must be converted into a LIF or used to purchase an annuity. Furthermore, there are also age restrictions as to when a LIF can be purchased by the plan holder. Payments out of the LIF cannot initiate before the plan holder is entitled to receive pension benefits. In other words, it is dependent on the pension plan where the money originated. For example if the early retirement age under the originating pension plan is 55 years of age, the owner of the LIRA can purchase a LIF at the age of 55.

LIF’s are designed to provide income each year throughout retirement up until the age of 90, at which time the plan holder may be paid the balance in the fund. The LIF plan holder may elect not to receive any income in the first year, but must begin receiving income payments from it before the end of the second year. All payments over the minimum amount from a LIF are subject to withholding tax. The Canadian Government has set both a minimum and maximum for the payments the plan holder can receive each year from the LIF. Consequently, the payment schedule is not as flexible as a non-locked-in RRIF. Nonetheless, within the specified range, the plan holder can choose a desired income stream. In recent years, there have been amendments to the LIRA conversion into a LIF. In particular, a plan holder now has the option to withdraw up to 50% of the money in a LIRA into cash or transfer the LIRA tax free into an unlocked registered retirement savings plan (RRSP) or registered retirement income fund (RRIF). However, this can only be done within 60 days from the date the money was transferred into the LIF from a pension plan or a LIRA[ii].

Upon death, a Locked-in owner’s spouse is entitled to transfer tax free the full value into an RRSP or RRIF. Another option is to withdraw the full amount in cash; however this is subject to income tax. Partial withdrawals are not permitted. If there is no spouse, the benefit will be paid out to the owner’s beneficiary. If there is no beneficiary, it will be transferred into the owner’s estate where it will be subject to both income tax and probate tax.

Finally, LIRA’s can be registered either federally or provincially. Since the statutory requirements for each province differ, an individual cannot transfer or combine a LIRA from different jurisdictions. They must be held in separate accounts.

To summarize the main points to take away from a LIRA are the following:

A LIRA has two primary goals: to preserve the money for retirement and provide a lifetime stream of retirement income.
The key distinguishing feature of a LIRA from the regular (non-locked-in) RRSP is that money cannot be withdrawn from a LIRA except in special circumstances.
The Canadian Government has set both a minimum and maximum for the payments the plan holder can receive each year from the LIF. Consequently, the payment schedule is not as flexible as a non-locked-in RRIF.