We’ve talked about RRSPs (the most well-known savings account that helps Canadians save money for retirement) and RRIFs (where all that money you saved eventually goes), but now, let’s pivot to LIRAs — or Locked-In Retirement Accounts.
And it’s here where employer pensions come into play.
What are Locked-In Retirement Accounts (LIRAs)?
Did you know:
- According to Statistics Canada, active membership in registered pension plans in Canada surpassed 6.4 million in 2018.
- There are two main types of employer pension plans: defined benefit plans and defined contribution plans.
The nature of work, however, has drastically changed in recent years. The days when you’d start with a company after graduating high school or university/college and stay there for 40 years are mostly over. Now, it’s not uncommon to hold several positions at a variety of companies over the course of a career. Career pivoting, contract work, and job-hopping are certainly more normalized than before.
So if you’re fortunate enough to have a job that offers a pension…what happens to it if you leave the position?
This is where Locked-In Retirement Accounts (LIRAs) enter the chat.
Simply put, if you leave your company or end up laid off, your employer pension gets transferred to a LIRA. These accounts can also go by Locked-In Retirement Savings Plans (LRSP).
End up staying at your job until retirement? Never had an employer pension? Then you’ll likely never have a LIRA. (But you’re going to want to open a TFSA or RRSP to save for retirement!)
How does a Locked-In Retirement Account work?
At its core, it really is as straightforward as explained above!
If you leave or get laid off from your job that has an employer pension, those funds get transferred to a LIRA, a type of registered account. You might also have the option of keeping your pension at your former company, with regular monthly payments sent to you once you retire, or transferring it to a new employer pension.
Where LIRAs have the advantage is that they give you more control over their underlying investments. Investments within this account grow tax-free, meaning that the investor does not pay taxes on gains as long as they remain in the LIRA.
Have more than one employer pension? You can’t merge LIRAs, so each pension requires separate accounts. Finally, you’ll be able to open a LIRA most likely at the same financial institute where your other registered accounts — RRSPs, TFSAs, etc — live.
Can you take money out of a LIRA?
The use of the phrasing “locked-in” does imply that accessing funds in your LIRA is, well, impossible. After all, these accounts are, by design, meant to ensure you have income for your post-retirement life — potentially a very long time.
So, by “locked” they really do mean locked — meaning you cannot withdraw money from your LIRA.
There are, however, very specific situations where you can apply to unlock your LIRA — which varies between jurisdictions. (FYI: if you have a provincially legislated pension, your LIRA will fall under the rules of the province where the pension plan was registered. Pensions under federal legislation, have a separate set of rules.) Many of these circumstances fall under one umbrella: financial hardship, defined as:
- You have high medical expenses or costs related to a disability
- You need to make upgrades to your home to accommodate your disability
- The rent on your principal residence (or that of your partner) is in arrears, and you’re facing eviction
- The mortgage on your principal residence is at risk of foreclosure
- You need the first and last months’ rent
- You’re expecting a big drop in income, to a very low level
Other reasons you can unlock your LIRA include:
- Shortened life expectancy
- You are no longer a resident of Canada
- If you have a small balance
- If you’re 55 or older, you can do a one-time 50% transfer to an account like an RRSP
(Click here for a chart outlining these reasons to unlock a pension + the provinces that allow for each.)
In all cases, proper documentation is needed — invoices, eviction/foreclosure notices, etc. For the most part, only one application to unlock a LIRA — per category of financial hardship, per year — is allowed. It’s also important to note that any funds withdrawn are considered taxable income.
While the above situations are very justifiable reasons for wanting to unlock the funds in your LIRA, there could be other options available to you. It’d be wise to consult with an advisor to help you weigh these and make an informed decision that works for you. A credit counsellor might be a good choice here.
LIRAs vs. RRSPs
Think of LIRAs as a close cousin to RRSPs. They are both registered accounts (learn more about these here and here) that house underlying investments.
One big difference is that LIRAs are essentially like a safe for your pension: The funds go in, the door gets closed and bolted, and you’ll only get the code when you retire. You can’t make contributions or withdraws — though there are specific circumstances wherein they can be unlocked.
With RRSPs, you’re allowed to contribute continuously throughout your working years. You can also withdraw funds, though this comes with tax implications.
Can I transfer my LIRA to an RRSP?
There are a few scenarios where you can actually do this.
As we mentioned above, if you’re 55 or older you can do a one-time 50% transfer. This means you can unlock 50% of the account’s value to another account like an RRSP.
When can I withdraw from a LIRA?
Much like how your RRSP needs to be converted to a RRIF when you’re winding down your working life, LIRAs need to be converted to a tax-sheltered Life Income Fund (LIF) so you can start receiving (taxable!) retirement income. This conversion must happen no later than December 31st of the year you turn 71, and you’d be able to start making withdrawals the following year.
A key difference between RRIFs and LIFs is that while they both have minimum incomes, LIFs have a maximum income — in place to ensure you don’t spend the money too fast. This also acts as a form of spousal protection.
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