Overview - Locked-in Pension Plans

How & why are they created?

Locked-in plans such as Locked-In Retirement Account (LIRA) or Locked-In Registered Savings Plans (LRSP) are triggered by a life event. You can not wake up one day and go to your local bank and ask “to open a LIRA or LRSP” like you can with a Registered Retirement Savings Plan (RRSP) or Tax Free Savings Account (TFSA). An event must occur where, due to legal reason, you are given the option to open a LIRA. The 3 main reasons that can create a situation where you will need to open a locked-in Pension Plan are:

Divorce: If you divorce a spouse/partner that has an employer’s pension plan, or they already have a locked-in pension plan from a former employer.
Death of spouse/partner: Your deceased spouse or partner had an employer’s pension plan or already had a locked-in pension plan from a previous employer. In certain cases, the law dictates that this plan goes to the surviving spouse.
Change in Employment: You were employed by an employer that provided a pension plan in which you both contributed. Normally these plans are called Registered Pension Plan (RPP). If you leave your employer for any reasons, be it because you got hired by a different employer or you were let go by your employer, the employer must provide you with a Termination Package which provides you with information on how much your RPP is worth and what benefits you can expect to receive at retirement if you leave your plan with them. You will also have the option to take the full value of the plan which is determined by a complex actuarial accounting formula where your plan is assigned a value based on your contributions, your employers contribution, the type of benefit you were to receive, your age, and expected age of death for your demographic. You will have the options to transfer that value as a lump-sum into a Locked-in plan. You will sometimes have a 3rd option to transfer the plan to your new employer if they have a pension plan. This is not always feasible even if your new employer has a pension plan as the structure of their plan might differ from your previous employer.

What are the types of locked-in Pension Plans?

There are 8 common different types of locked-in pension plan (and a few more rarely used ones). We will focus on the 8 main ones here. All plans come with different rules and purposes based on which province’s jurisdiction they are under, and what type of account they are. There are plans that are under federal rules and regulations which have their own set of rules as well. It does get confusing to understand the different between a LRSP VS a LIRA or a LIF VS a RRIF but fear not! We are here to simplify things and explain them clearly.

All locked-in plans share common goals and benefits:

Tax Sheltered: This means that the money your plan makes or the growth in value it accomplishes is out of the tax man’s hand and you don’t pay taxes as long as the funds stay in the plan.
Capital Growth & Income Retirement. This goal is to make your money grow until you reach the age of retirement at which point the funds must be transferred tax-free to another type of locked-in plan whose purpose is no longer to grow your money, but rather to pay you out the money you accumulated to finance your retirement.
Flexible Management Options: You can either give the responsibility of managing the money in your locked plan to a professional investment advisor or you can choose to self-manage it and make decisions for yourself.
Locked-in: With few exceptions, you can not take the money out before you reach the age of retirement.
Creditor Protection: Money held in locked-in plans can not be touched by your creditors, even if you file for bankruptcy or consumer proposal.
You can’t contribute to it: Once a LIRA has been created and funded either through your former employer’s pension plan, you can not add money into it like you can in a RRSP or TFSA. The only way your Locked plan can grow is through investment growth or the receipt of dividends from investments you hold in the plan.
All plans are either Provincial or Federal: If your employer was a Government of Canada Department, a Crown Agency, The Military, RCMP, OR an employer that is nationally regulated (eg: airlines, broadcasters, national railways) OR your employer is from the Northwestern Territories, Yukon or Nunavut, then your plan will be under federal rules. Most other situations will be provincial and are mostly private employers/corporations, municipal and provincial governments and agencies.

While they share commons goals and benefits, they have different purposes and we like to break down these plans into 2 categories which we call Phase 1 (Capital Accumulation) and Phase 2 (Retirement Income).

Let’s start with a quick overview of the 8 different types of plans based on their phase and how they fit in your retirement.

PHASE 1 – Capital Accumulation

Phase 1 plans’ purpose is to hold your funds and invest them to accumulate savings and grow in value so that when you retire you will hopefully have a decent nest egg to finance your retirement. It is almost impossible, with few exceptions, to withdraw funds from a Phase 1 account until you reach the retirement age dictated by the plan (55 to 65 in most cases).

Even then once you meet the age requirement, you are not allowed to retrieve all the funds at once. The government wants to make sure that this money will last you for many years to finance your retirement. When you reach your plan’s allowed retirement age, you will have a few options which are:

Leave the funds in the plan and not draw any money from it and let it keep growing for when you decide you need to start taking money out. There are no rules that state that you must start taking the money out when you reach the minimum retirement age for your plan. You can leave your money in a Phase 1 account until the year you reach 71 years of age.

OR
Start taking money out of your plan but before doing so, you must transfer your plan to what we call a Phase 2 Locked-in plan.

Phase 1 Plan Types

Locked-In Retirement Account (LIRA): They are regulated individually by each of the provinces except for Prince Edward Island which does not have a pension plan legislation. The other exceptions are the Northwestern Territories, Yukon and Nunavut which fall under Federal rules. The purpose of a LIRA is to hold investments until you reach the age of retirement with the goal to make its value grow gradually until you can retire. In most cases you can transfer your LIRA into a LIF, PRIF, or RLIF at age 55 or older (varies by province and types of plans – some allow for earlier age) from which you can then start drawing money to pay yourself a retirement income. By law, your LIRA must be converted into a LIF, or equivalent, no later than the year you turn 71.
Locked-in Retirement Savings Plan (LRSP): Similar to a LIRA, but with the main difference being that it is under federal rules instead of provincial rules and it has some slight difference in when and how you can access the money. However, it works the same way as a LIRA and it must also be converted, tax free, to a Phase 2 account the year that you turn 71.
Restricted Locked-In Savings Plan (RLSP): This plan falls under federal rules. This plan works hand in hand with the Phase 2 RLIF accounts where funds in RLIF prior to age 71 can be held in an RLSP and a one time unlocking of 50% of the value of the plan is allowed.

PHASE 2 – Retirement Income

Phase 2 plans purpose is to pay you whatever value your phase 1 plan achieved by the allowed retirement age of the plan. At that point the plan can be converted into Phase 2 plans such as a LIF, PRIF, RRIF, RLIF (they are all more ore less the same but differ in names based on the province they are set-up under).

In most cases it is mandatory to convert your Phase 1 account before December 31 of the year you turn 71. It is possible to convert your Phase 1 to Phase 2 earlier depending on your account type and legislation. Converting your Phase 1 into a Phase 2 is tax exempt, but withdrawals made from Phase 2 accounts are taxable income.

Once converted to a LIF or equivalent account, there are mandatory minimums annual amounts that you must take out from your Phase 2 account. There are also maximum amounts you can take out each year to prevent you from depleting your retirement savings too early. However, some plans offer some flexibility and allow for strategies to let you take out the full of value of the plan or 50% of it. Some plans allows you a one-time unlocking opportunity of up to 50% of the value of your plan at the time you convert it to a Phase 2 account.

Phase 2 Plan Types

Registered Retirement Income Fund (RRIF) & Life Income Fund (LIF): RRIF and LIFs work the same way and have the same purpose which is to pay you a regular income once you retire. The income comes from the savings you accumulated in either your LIRA or LRSP which is transferred to the RRIF or LIF tax free.

You are obligated to take out yearly minimum amounts but there is also a cap on how much you can take out in a year which prevents you from taking all the money out at once. This rule is meant to ensure that you have income for many years during your retirement. In most cases, it is mandatory to convert your LIRA /LRSP or regular RRSP to a LIF or RRIF by the age of 71 and start taking the money out gradually or buy a life annuity. Any money taken out is taxable.
Prescribed Retirement Income Fund (PRIF): Only available in Manitoba and Saskatchewan. These plans work the same as a LIF. You must make mandatory yearly minimum withdrawals (the % is based on your age) but they offer one big advantage over a LIF – there are no maximum withdrawal cap. Whereas a LIF forces you to take a minimum amount, it also limits the amount you can take out in a year. You can’t deplete the plan in one lump-sum. The PRIF has no maximum withdrawal which means that you can withdraw the full value of the plan at any time you want, be it through one withdrawal or installments at whichever amount and pace you want. Any money taken out is taxable.
Locked-In Retirement Income Fund (LRIF): It is the same as a LIF but it is only available in Newfoundland & Labrador with the main difference being that once your reach the age of 80 you are obligated to buy a life annuity with the balance. Any money taken out is taxable.
Restricted Life Income Fund (RLIF): This is another type of LIF but this one is only available to plans under federal rules. Its main advantage is that it allows for a one time tax free transfer of 50% of the plans value into a regular RRSP which allows you to take out as little or as much as you want without any minimum or maximum rules at the pace you want. In other words, once the 50% is transferred to a regular RRSP, you can take the complete 50% out at once if that is your wish, or you can keep it there and only take your bigger amounts when you have a need to do so such as when making a big purchase that you don’t want to finance. Any money taken out of RLIF is taxable.

So there you go, we hope that this explains it a bit better!