LIRA in Ontario (Locked-In Retirement Account)

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Do you have a pension plan with your current job, but you are considering changing jobs and are wondering, "What should I do with it?"

One option is to leave your pension alone. Another option is to invest your pension in a locked-in retirement account (LIRA). The LIRA provides many unique benefits and is worth considering, but it is important to understand how and when you can access the money parked in it.

What is a Locked-in Retirement Account?

A LIRA is a pension-related savings account in Canada that "locks" you into saving for retirement. Except in extreme circumstances, you cannot access the funds in an LIRA before reaching a certain age. While the age limit varies by province, most people over the age of 55 are eligible for a one-time unlocking of up to 50% of their LIRA. You can keep a LIRA until the end of the calendar year in which you turn 71.

Having an LIRA gives you the peace of mind that comes with knowing you'll have a steady stream of income when you need it the most (i.e. after retirement). A LIRA, on the other hand, is not something you can open whenever you want. It is only available in the following two circumstances:

1. You leave a job that had a pension plan. If your workplace has a pension plan and you switch jobs, you would have to decide what you want to do with this pension. One option is to transfer the old pension plan to a Locked-in Retirement Account (LIRA).
2. You receive money from your former spouse’s pension plan. For example, as part of the divorce settlement, you received a portion of the money saved in your ex-pension spouse's plan. You can save this money in an LIRA and then withdraw it and the investment earnings when you retire.

Funds in an LIRA grow on a tax-deferred basis, meaning you pay tax only when you make withdrawals. This is a tax-saving strategy because when you finally access the funds, you would most likely be in a lower tax bracket than today, since you would have retired.

A LIRA should not be confused with a registered retirement savings plan (RRSP). While both are tools for preparing for retirement, they operate in different ways. A LIRA, unlike an RRSP, does not allow contributions, but you do have several options for investing the funds in your LIRA account. 

A LIRA can hold a variety of investments, such as stocks, guaranteed investment certificates (GICs), bonds, index funds, and mutual funds. Earnings on your investments grow tax-free while in the LIRA but are fully taxable when withdrawn.

Upon reaching retirement age, you must withdraw money from the LIRA. There are three ways to do it: 

1. Convert your LIRA into a life income fund (LIF). It works like a registered retirement income fund (RRIF), allowing you to choose how frequently you will make withdrawals, but is less flexible.  
2. Turn the LIRA into a life annuity. You will receive a predetermined periodic payout amount until your death. A life annuity, like a LIF, is designed to provide you with a steady retirement income.
3. Covert part of the LIRA into a LIF and part of it into life annuity. 

Regardless of the option you pick, the law requires you withdraw funds from your LIRA no later than December 31 of the year in which you turn age 71. 

How Does a Locked-in Retirement Account Work?

If you have an old pension plan or receive money from your former or deceased spouse's pension plan, you can open an LIRA account. Because an LIRA is a type of registered account, it has tax advantages. Money in an LIRA account grows tax-free for the duration of the account. Once the account is unlocked, withdrawals are taxed as income.

Your LIRA is managed by you, not your employer or a financial institution. A LIRA can be established at almost any financial institution, including banks, credit unions, trust companies, and life insurance companies.

You cannot contribute to your LIRA, unlike other pension plans. Nonetheless, depending on your investment choices, the funds in your LIRA continue to grow in value. The LIRA allows you to choose from a variety of investment options, such as stocks, index funds, mutual funds, bonds, and so on. Account holders can manage their LIRAs on their own or with the assistance of a robo-advisor or a financial advisor.

In most cases, the minimum withdrawal age is 55 years. You can convert up to 50% of your pension funds at this point into a life income fund or a life annuity. You can also leave all of your money in your LIRA until later. Remember, you can only have an LIRA until the end of the calendar year in which you turn 71. Then, each year, you must withdraw a minimum percentage based on your age. There is also a maximum withdrawal limit, which, like the minimum limit, increases with age.

Who is Eligible for a LIRA?

LIRA is intended for people who are under the age of 71. You must also have a sponsored group pension plan from a previous employer in order to open an LIRA. If you want to leave a job with a pension, you have two choices:

• you can keep the pension plan with your former employer until you retire; or 
• you can set up a LIRA account with a financial institution of your choice and transfer the pension to it.

To open an LIRA, you do not need to have an existing pension plan in your name. Those receiving funds from their former or deceased spouse's pension plan are also eligible for LIRA, provided they meet the age requirement.

How Can You Get Money Out of a LIRA? 

The rules for LIRA withdrawals differ by province. Nonetheless, most provinces allow for the one-time release of up to 50% of the funds in an LIRA at the age of 55. You can access your pension money in three ways: (1) turn it into a life income fund, (2) convert it into life annuity, or (3) convert a portion of your LIRA into life income fund and the remainder into life annuity.

Withdrawing from an LIRA before the age of 55 is possible, but only in very limited circumstances. Again, the rules for making early LIRA withdrawals vary by jurisdiction. Four reasons common to multiple provinces are:

1. Financial Hardship

If you are facing financial hardship, you may be able to access your pension funds before retirement, depending on where you live. Each province has its own definition of financial hardship, and not every province considers it a valid reason for premature LIRA withdrawals. British Columbia and Alberta, for example, have five categories of financial hardship, whereas Manitoba does not allow early unlocking of an LIRA due to financial hardship.

2. Shortened Life Expectancy

You may access your pension funds before the age of 55 if you have a disability or terminal illness with a life expectancy of less than two years (as certified by a physician).

3. Non-residence in Canada

You may unlock the LIRA account before turning 55 if the Canada Revenue Agency (CRA) declares in writing that you a non-resident of Canada for tax purposes. 

4. Small Amounts

If the money inside your LIRA is too small for a useful pension, you may unlock the pension fund early. Generally, that level is set as 20% of the Yearly Maximum Pensionable Earnings (YMPE). In 2022, the YMPE is $64,900. That means you can unlock your LIRA early if it has $12,980 or less. 

What is a Life Annuity? 

A life annuity is a financial product that provides you a predetermined periodic payout amount for as long as you live. It is typically used to supplement retirement income because there is no risk of outliving your savings. When you purchase an annuity, the risk is transferred to the annuity provider.

What is a Life Income Fund (LIF)?

A LIF is a government-regulated and registered plan that can assist you in planning for retirement. It is designed specifically for your locked-in pension assets and provides you with an annual retirement income for the rest of your life. You cannot increase your LIF contributions or withdraw all of your money at once. There is also a minimum and maximum yearly withdrawal amount that is set by the federal and provincial governments and varies by age.

Just like an LIRA and RRSP, a LIF can hold various kinds of investments, like segregated funds, GICs, and mutual funds. Investment gains are not taxed while held in a LIF. You only pay tax on them when you begin withdrawing from your LIF.

Locked-in Retirement Account (LIRA) vs. Registered Retirement Savings Account (RRSP)

A RRSP is a retirement savings account to which you make contributions over the course of your working life, and in return, enjoy a steady income after you hang up your boots. A RRSP provides certain tax benefits over a regular savings bank account, making it an appealing option for retirement planning.

To begin with, contributions to an RRSP are tax deductible. Assume your annual income is $100,000 and you contributed $40,000 to an RRSP this year. That means you have a total taxable income of $60,000 this year.

Second, the funds in your RRSP grow tax-free. You will not be taxed on it as long as it remains in your RRSP. Because an RRSP is a retirement planning tool, you will most likely withdraw funds when you reach retirement age, when you will probably be in a lower tax bracket than you are now.

The LIRA and RSSP share many similarities, but key differences also exist. Let us first look at the similarities: 

• Both grow tax deferred.
• Both are protected from claim of creditors.  
• Both must be closed by the last day of the calendar year you turn 71.  

The main differences between the two are as follows: 

Unlocking a Locked-in Retirement Account in Ontario 

With a few exceptions, the earliest you can access an LIRA in Ontario is at the age of 55. The most time you can keep an LIRA is until December 31 of the year you turn 71.
When you reach the age of 55, you can transfer up to 50% of your LIRA savings to a life annuity, a life income fund, or both.

You may qualify to access your LIRA funds before age 55 if you: 

• are facing severe financial hardship (Ontario has 5 categories for financial hardship)
• are a non-resident of Canada
• have a disability or terminal illness and are expected to not live more than two years
• have saved only a small amount in your LIRA (which is not sufficient to fund a useful retirement income).

What is a Locked-in Retirement Income Fund (LRIF)?

A LRIF is a pension vehicle for receiving retirement income. A LRIF is very similar to a LIF, but there are two major differences between the two:

1. LRIFs are available only in Labrador and Newfoundland
2. The maximum amount you can withdraw in a year from a LRIF is different from a LIF.

An LRIF, like a LIF, has annual maximum and minimum withdrawal limits. An LRIF cannot usually be cashed out. You can, however, select from a variety of investment options for growing your money inside an LRIF.

How does a LIRA compare to other retirement saving products?

There are many pension plans out there, each with its pros and cons. Go through your options or consult a financial advisor to pick a plan that is right for your age, family’s financial needs, and current and future plans.

Pros and Cons of a Locked-in Retirement Account

The LIRA has many things going for it, but like any other financial tool, it has some drawbacks. First, let us take a look at its pros. 

Pros

1. Protects your pension: With LIRA you can rest easy knowing you would not lose the pension even if your former employer becomes bankrupt. 
2. Tax-deferred growth: Funds in an LIRA account grow tax-deferred, which can provide you with a boost over time by allowing you to save more money for retirement and reducing the tax impact when you withdraw funds. Because an LIRA is a tax-deferred investment vehicle, you pay taxes when you withdraw the funds rather than when you deposit them. Investment gains are also not taxable as long as your LIRA account is not touched. Because investment gains are reinvested and no tax is deducted, the potential for growth is greater than in a comparable retirement savings plan that requires you to pay capital gains tax on an annual basis. Furthermore, because you are investing for retirement, you will most likely be in a lower tax bracket when you withdraw funds.
3. Comes with a lock-in period: The age at which you can access your LIRA depends on your provincial laws, but most provinces allow a partial withdrawal at the age of 55. Unless there are exceptional mitigating circumstances, your LIRA account is locked away until you reach the age limit. This can be advantageous for those who may be tempted to withdraw their retirement funds prematurely.
4. Multiple investment options: The LIRA gives account holders a wide range of investment choices, ranging from stocks GICs, and bonds, to index funds and mutual funds. You can choose whatever investments you want and watch your money grow on a tax-deferred basis. 

Cons

1. Cannot withdraw funds before age 55: The LIRA has the term “locked-in” in its name for a reason — withdrawals before the age of 55 are not allowed.
2. Less flexible than a RRSP: Compared to a regular RRSP, a LIRA offers less flexibility. Once you open a LIRA, you cannot add more money to it. The money held in your LIRA comes directly from your old pension or a pension plan of your former or deceased spouse. 
3. Must be converted before age 72: A LIRA is not for forever. You can have it only till the end of the year you turn 71. By December 31 of that year, you must convert it into a Life Income Fund or Life Annuity. 
4. Management fees can sometimes be high: You can open an LIRA at almost any financial institution, but management fees can vary greatly between providers. Some institutions charge high maintenance fees, so do not forget to shop around.
5. Regulations are not the same across provinces: The LIRA is regulated at the provincial level. As such, regulations vary from one province to the next, making it a tad trickier to know all the rules surrounding your LIRA. 

Conclusion

A locked-in retirement account (LIRA) is used to grow funds from a previous employer's pension plan. You can also open it if you have received funds from a pension plan of a former or deceased spouse. LIRA funds grow tax-deferred and can be invested in one or more investment vehicles such as bonds, mutual funds, and stocks. You cannot access your LIRA funds until you reach a certain age (usually 55), and you can only keep money in an LIRA until December 31 of the year you turn 71. You can convert the money in your LIRA into a life annuity, a life income fund, or both to receive a regular payout amount for the rest of your life. If you want to learn more about LIRA, speak to one of our brokers today.

Frequently Asked Questions

1. How is your pension protected with a LIRA?

The money in your LIRA is meant for your retirement years — and the rules surrounding the LIRA ensure that is how it is used. You cannot access the funds before age 55 even if you want to, except in very few circumstances. Also, a LIRA typically holds different types of investments, like stocks GICs, bonds, index funds, and mutual funds. Diversifying your investments, in turn, can potentially increase the growth potential. 

2. When can you unlock a LIRA?

When you can access your LIRA depends on the provincial rules governing it. However, most provinces let account holders unlock up to 50% of their LIRA at the age of 55. 

Before age 55, you can unlock your LIRA only in one of these circumstances: 

• you are facing financial hardship
• you are leaving Canada permanently
• you have a terminal illness or a disability that will significantly reduce your lifespan
• you have too little money in your LIRA to be regarded as useful for pension purposes.

3. What happens to your LIRA when you die?

The remaining funds in your LIRA account will be passed down to your beneficiaries. Unless they waive this right, most provinces require you to name your spouse or common-law partner as your beneficiary. Some provinces will allow you to transfer the remaining funds in your LIRA to your common-law partner, spouse, or dependent children's RRIF or RRSP. If you do not have a partner or spouse, the benefit will be paid to a designated beneficiary or, if none designated in your estate plan, to your estate.

4. Can a locked-in LIRA be taxed?

No, a locked-in LIRA cannot be taxed. Your savings and investments gains are not taxable as long as they are inside your LIRA. They will get taxed when you withdraw them (i.e. unlock your LIRA). 

5. Would I need another LIRA if I leave a second job with an employee pension plan? 

That depends on whether the second pension plan is in the same jurisdiction as the first one. Multiple sponsored group pension plans can be transferred into a single LIRA as long as they are registered in the same province. For example, if you already have an Ontario-registered LIRA into which you transferred a pension plan from a previous employer and later join a company with a pension plan that is also registered in Ontario, you could transfer the second plan into your existing LIRA when you leave this job. However, if your second job has a pension scheme registered in a province other than Ontario, such as British Columbia, you will need to open a new LIRA.

6. What investments can I hold in my LIRA?

While you cannot make additional contributions to your LIRA (over and above your pension funds), you can invest the funds in a variety of assets such as stocks, mutual funds, guaranteed investment funds (GIFs), and bonds. Investment gains are not taxable while inside your LIRA, but they become taxable once you unlock it. The assets you should invest in through your LIRA are largely determined by your risk tolerance and time horizon.