Converting Your LIRA Into Retirement Income

Do you have pension plan money from a previous employer?  If you left your company prior to retirement, for whatever reason, you would have been given the option of taking your pension funds as a lump sum commuted value of the plan.

You would have transferred the funds away from the pension plan administrator and into your own personal name as a Locked-In Retirement Account (LIRA) which you invested on your own or with the help of your advisor.

Locked in plans have unique regulations specified by the pension legislation of each province, or federally, and are designed to provide the same benefits as the original pension plan.

Different provinces have different names for their plan, but for simplicity, I’ll refer to them as LIRA and LIF.

The legislation applies to the province where the pension was set up. So, if you worked in BC and your company’s Head Office is in Ontario, you likely are under Ontario legislation. Some people, such as government employees, may be under federal legislation. Don’t assume you know. Ask your former employer or consult your pension agreement for details.

Creating retirement income from your LIRA

Generally, because the funds originated from a pension plan and are “locked-in,” you can’t make lump sum withdrawals. 

The money has to be converted into some form of income generating account.

In many ways it is similar to switching a RRSP to a RRIF, but there are some differences.

To create retirement income, you must convert your LIRA into one of:

  1. A life annuity. This is the closest resemblance to receiving monthly pension income. The annuity provides you with a regular, specific payment for life. The amount paid will depend on the terms of the contract and includes such things as your age, current interest rates, and the amount you have to invest. The standard form of payment is a 60% joint and survivor annuity.
  2. LIF (Life Income Fund) or LRIF (Locked-in Retirement Income Fund – ON, MB, NFLD) or RLIF (Restricted Locked-in Income Fund – Fed). These offer a more flexible alternative to an annuity and give you more control over your investments. You must withdraw a minimum amount based on the Income Tax Act rules (similar to a RRIF) but your withdrawals are also subject to a maximum amount so you won’t deplete the account too soon. In Newfoundland, a LIF must be converted to a life annuity at age 80.
  3. PRRIF (Prescribed Registered Retirement Income Fund). This account most closely resembles a RRIF in that you must withdraw a minimum amount, but there are no maximums. They are only available in Manitoba and Saskatchewan. Your spouse is automatically named as beneficiary but may sign a waiver allowing you to designate a different beneficiary.

Like a RRSP you have to make the conversion by the year you turn 71 but you can start payments as early as age 55 (an exception is Alberta where the minimum age is 50).

Unlocking 50% of funds

Having a maximum withdrawal amount can be frustrating for many people who want to take out more.

Recognizing the need for some flexibility, a fairly recent feature is the ability to withdraw, or transfer to a RRSP or RRIF, up to 50% of your LIRA at the time you convert it to a LIF – essentially unlocking it.

Why would you want to do this?

A withdrawal may be a necessity if you have no other income, or maybe you want to pay off a large debt that’s hanging over your head. Just remember that the withdrawal will be taxed as regular income, so make sure it’s a worthwhile thing to do.

If the money is transferred to a RRSP or RRIF, there are no immediate tax consequences. The benefit of unlocking the funds is that you have more flexibility to withdraw money when you want or need it without being limited to the maximum amount. You may want more income in the early years of retirement for example, or if you retire before you are permitted to start collecting government benefits.

Personal circumstances will dictate whether or not this is beneficial for you. In most cases, you’ll need your spouse’s consent.

Accessing small amounts

If the amount in your LIRA is considered to be too small to provide a useful pension you may be able to unlock the entire amount. That set level is based on the Yearly Maximum Pensionable Earnings (YMPE) which is $57,400 for 2019.

If you are younger than age 65 you can unlock amounts up to 20% of the YMPE ($11,480) and those over 65 can unlock up to 40% ($22,960).  Individuals over 55 with federally regulated funds can close out up to 50% ($28,700).

There can be some slight variations depending on the pension rules for different provinces.

Consolidating plans

If you have multiple LIRAs from several companies you’ve worked for, you can consolidate them into one LIF if the provincial legislation is the same. If they fall under different jurisdictions, B.C. and Newfoundland, for example, they will have to remain separate – remember each province/federal has different regulations.

The bottom line

To fully understand your choices, be sure to review your pension documentation well ahead of time so there are no surprises. 

Make sure you understand the requirements associated with your LIRA and consider which option is likely to work best for your particular circumstances.

Make sure you add a beneficiary or successor annuitant as this is a brand new contract.

Related:  Choose Your Beneficiaries Wisely

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