As an actively employed individual, you probably have made or are considering making contributions into a registered retirement account towards your pension savings. If your employer matches or has a retirement savings plan set up for you, you may find yourself ending up with a locked-in retirement account (LIRA) at some point. If you wonder how your retirement account becomes locked in the first place, here’s how it works.
A locked-in retirement account commonly referred to as a LIRA is a registered pension account that restricts its owners from making withdrawals before retirement. Retirement accounts in Canada become locked-in mainly due to transferring your pension when you leave your current employer. Upon termination of employment, one of the options for your current pension plan is to transfer it into a locked-in retirement account. Although the money contributed into the pension plan is vested, and ownership has been transferred to you, the Pension Benefits Act provides restrictions on withdrawals until retirement. When you retire, the money in your locked-in retirement account can then be paid to you.
After transferring your retirement savings in a pension fund to a LIRA, this can be converted to a life annuity, a life income fund (LIF), or a locked-in retirement income fund (LRIF). Either option would provide retirement income when you become eligible.
Although there are restrictions in place to prevent any withdrawal of cash from locked-in retirement accounts before retirement, there are exceptions. Different provinces have specific guidelines on circumstances that may qualify for early unlocking of a LIRA. The funds in a locked-in retirement account can be accessed in some provinces based on certain conditions and circumstances. These include:
Financial hardship: If you are deemed to be facing financial hardship and need assistance, you may be allowed to withdraw cash from your LIRA. Common causes or evidence of financial hardship that can give you access to money in your locked-in retirement account are huge medical expenses, inability to pay your rent or cover your mortgage, and low income. Most provincial regulations allow you to access your retirement savings in a LIRA only once a year for financial hardship reasons.
Age and amount in the pension account: Some provinces allow you to have access to cash from your locked-in retirement account if you fall within a certain age bracket and the total value of the funds in all your locked-in accounts is less than a given percentage of the Year’s Maximum Pensionable Earnings (YMPE) under the Canada Pension Plan. The set age and percentage vary across provinces. For example, in Ontario, you may have access to cash in your LIRA if you are 55 and above and the sum of your pension entitlements in your locked-in retirement accounts is less than 40 percent of the year’s maximum pensionable earnings (YMPE). Alberta, on the other hand, provides a minimum amount threshold of 20 percent of the YMPE for individuals who are under 65 and 40 percent if 65 and above.
Life expectancy: Due to health reasons like critical illnesses or physical disabilities, life expectancy may be cut short. As a result, with allowable medical evidence such as a letter from a physician that shows that life expectancy has been reduced, usually to two years or less, you may be able to get a lump sum from your locked-in retirement savings plan. Under certain circumstances, if you have a pension partner, they will have to sign and forgo their right to a joint and survivor pension.
Residency in Canada: If you are deemed a non-resident of Canada by the Canada Revenue Agency (CRA) for tax purposes, you may qualify for cash withdrawal from your locked-in pension money after at least 24 months of being out of the country. For an application to unlock your LIRA, you would need a letter from the CRA confirming your residency status.
Other reasons that may allow you withdraw from a LIRA in certain provinces are if the money transferred from your pension plan into your locked-in retirement account is above the limit set by the federal income tax act. In addition, if you are 50 years and above, you may unlock up to 50% of the money in your pension or LIRA when you transfer your pension to a LIF.
To withdraw cash from your locked-in retirement account, you would need to send an application to the financial institution or pension plan where you have the locked-in account. The financial institution will process your application based on the forms and information provided to ascertain if you qualify for accessing your LIRA funds based on the employment pension plan regulations.
If you have been approved, you can receive your money in cash, have it deposited in your bank account, or transferred into a personal RRSP.
If you have reached the retirement age specified in your jurisdiction and have a LIRA, you can have access to your pension income. To receive your pension income, you would need to buy a life annuity or transfer to a Life Income Fund (LIF). When you use the funds in your LIRA to purchase a life annuity from an insurance company, you receive retirement income for life. If you use your LIRA to purchase a LIF, you will receive pension income based on certain factors determined your financial institution and you will be entitled a minimum annual amount based on the Income Tax Act (ITA).
Different provinces have specific regulations for unlocking your locked-in retirement account, so it is important to know under which provincial or federal laws your LIRA operates. Also, any money in a locked-in retirement account is usually shielded from creditors. Upon withdrawal of your retirement savings, you may not have protection over your savings which creditors can claim. Finally, there could be tax implications for withdrawals made from your LIRA, so be sure to speak to financial advisors and tax experts on the optimal decision regarding accessing your retirement money early.
