If you’re fortunate enough to work for a company that provides you with a pension plan, when your employment ends you may have the option to transfer the proceeds from your pension into a personal investment account. This is where “locked-in” registered retirement savings plans come into play.  

What type of funds are transferred to locked-in accounts?

The option to transfer the value out of your pension plan depends on your age and the type of pension plan you have. If you have a defined contribution pension plan, it is likely that your pension proceeds will be transferred to a locked-in account. 

However, if you have a defined benefit pension, that will provide you with lifetime income payments throughout your retirement, locked-in accounts may or may not be an option, and may or may not be the right solution for you. Review Pension payout: Your options explained for the areas you will need to consider when making this important decision. 

How can I use locked-in accounts?

Depending on the pension legislation that applies to your pension, if the assets are being transferred out of the plan, they will likely be transferred to a Locked-In Retirement Account (LIRA) or Locked-in Retirement Savings Plan (LRSP). The transfer of the proceeds from the pension plan to a LIRA or LRSP does not change the fact that the pension plan was set-up to provide you (and your spouse or common-law partner, if applicable) with lifetime retirement income.  As a result, the money transferred must be used for this purpose. Withdrawals are not permitted. If you have an Alberta LIRA and are at least 50 years old, you can initiate on-going retirement income with a transfer of the locked-in proceeds to a locked-in, Life Income Fund (LIF). Alternatively, you can use the proceeds to purchase a life annuity that will make ongoing payments to you for the remainder of your life.

LIRAs and LIFs are similar to their more well known “cousins”, the Registered Retirement Savings Plan (RRSP) and Registered Retirement Income Fund (RRIF). However, in addition to being subject to rules governed by the Canadian Income Tax Act (ITA), LIRAs and LIFs are also subject to additional rules governed by the applicable provincial or federal pension jurisdiction. Generally, these additional rules are intended to ensure lifetime retirement income is available for both the original pension plan member and the member’s spouse or common-law partner, since those were the intentions of the original pension plan. 

What are LIRAs?

A LIRA is the locked-in version of an RRSP. More specifically, it’s an RRSP that is set-up to hold funds that have been transferred tax-deferred from a registered pension plan. A LIRA account has an addendum included as part of the contract which contains additional rules limiting access to these funds and includes spousal protections. There is no minimum age for establishing a LIRA. Similar to an RRSP, the investments in your LIRA increase in value on a tax-deferred basis. However, unlike an RRSP there is no ability to make withdrawals from a LIRA. 

In Alberta, any time after age 50, the proceeds can be transferred to a LIF and retirement income is then initiated from the LIF account. In other jurisdictions, this option is not available until age 55. In all jurisdictions, the proceeds in a LIRA must be transferred to a LIF or life annuity by the end of the year the LIRA holder turns age 71. This ensures retirement income is initiated no later than age 72.

Although LIRA is the term for an Alberta regulated locked-in plan, there are similar plans in other jurisdictions including Locked-in Retirement Savings Plans (LRSPs) and Restricted Locked-in Savings Plan (RLSPs). 

What are LIFs?

A LIF is the locked-in version of a RRIF and, similar to a RRIF, provides the account holder with income in retirement. More specifically, a LIF is a RRIF that as part of the contract has an addendum that includes additional rules regarding withdrawals and spousal protections. Unlike a RRIF, which only has minimum withdrawal amounts, a LIF is also subject to maximum withdrawal amounts. Since these funds originated from a pension plan and were meant to provide a lifetime retirement income, pension legislation imposes a maximum amount on the withdrawal each year to ensure the proceeds cannot be spent before a certain age. Generally, the maximum withdrawal percentage ensures that there is ongoing income to at least age 90.

The ATB Wealth Locked-in accounts reference guide is available if you wish to learn more about locked-in accounts.