If you left a company with a pension before retirement, chances are you had to move the money into a Locked in Retirement Account (LIRA). That's because both the federal and provincial governments do not permit you to convert your pension into cash.
LIRAs are designed for accumulation of money that originated from a pension plan. People who leave employers with either Defined Benefit Plans (DB) or Defined Contribution Plans (DC) can move their pension funds into LIRA where they can self manage their asset (with or without the help of a financial advisor).
LIRAs do not allow for lump sum withdrawals and there are no options to create income. If you want income from your LIRA, you will have to either transfer to a Life Income Fund (LIF) or a Life Annuity. Typically the need for income from happens when your retire.
How can you get money out of a LIRA?
Back in 2008, Finance Minister Jim Flaherty introduced changes to allow Canadians easier access to their Locked-in retirement accounts (LIRA). Prior to 2008, it was very difficult for Canadians to access their own pension money because the rules were designed with the intent of trying to ensure lifetime income. As a result, there were restrictions in place preventing people from spending their pension funds too quickly.
Generally speaking the only way to get money out of your locked in accounts is to retire, in most cases after the age of 55 (Some situations allow for access to funds before the age of 55 – see below). When you need income, you have 2 or three options depending on the province you live in. You can Transfer to Life Income Fund (LIF), a Life Annuity and where applicable a Life Retirement Income Fund (LRIF).
Exceptions to every rule.
You cannot access pension funds prior to 55 years of age except for a few exceptions:
- Different provinces mean different rules. Pension rules can be pretty complicated and confusing because every province has it's own set of laws. For example, Alberta allows for access to locked in accounts at the age of 50. Taxtips.ca does a pretty good job giving information on each of the different provinces.
- Access to small amounts. Amounts held in a locked-in contract are considered to be too small to provide a useful pension if the dollar value of that account falls below a set level (20% of the YMPE). For the year 2013, the set level is less than $10,220 in any single locked in account at any age on the day you request the withdrawal. If you are over the age of 65, the amount is $20,440. For individuals 55 or older with total holdings in federally regulated locked-in funds of up to $25,500 will be able to wind up their accounts or convert to a tax-deferred savings vehicle with no maximum withdrawal limit, such as a Registered Retirement Income Fund or a Registered Retirement Savings Plan (RRSP). The threshold for small holdings will increase with the average industrial wage.
- Shortened Life expectancy. If you have a terminal illness or a disability that is expected, in the opinion of your doctor, to shorten your life considerably, then your LIRA or LIF may be unlocked. Your doctor must provide the shortened life opinion in writing. Also, you may not withdraw the funds unless your pension partner consents to giving up his or her entitlement to a joint and survivor pension.
- Becoming non-resident of Canada. If the Canada Revenue Agency (CRA) determines that you are a non-resident of Canada for tax purposes, and confirms this in writing, then you may unlock your LIRA or LIF. Once unlocked, the funds may be transferred into a regular bank account or transferred into an investment account that is not subject to the Act. You do not have to wait until age 50 to access those funds, nor do the funds have to be paid out in a set manner. Taxation still applies on withdrawal.
- Financial Hardship. If you are facing a situation of financial hardship, you may apply to the Superintendent of Pensions to release of some or all of the funds in your LIRA or LIF. There are a number of situations of financial hardship. Federally, no permitted withdrawals are allowed under financial hardship when expected income is 75% of the YMPE (i.e. $38,325 for 2013) or higher. Those with high medical or disability-related Costs can also apply for unlocking under the financial hardship rules: The amount of medical expenditures up to a maximum of 50% of the YMPE (i.e. $25,550 in 2013) provided that medical expenditures exceed 20% of expected annual income.
- 50% Unlocking. The 50% unlocking does not apply in all jurisdictions. If you live in Alberta or you have a Federally regulated locked in account, you may qualify to unlock up to 50% of your holdings and transfer them to an RRSP where there is no restrictions on withdrawal. This can only occur at the time when you are moving money from a LIRA to a LIF or Annuity.
Other related Articles
Federal rules for unlocking (OFSI)
Rules for unlocking pension funds (Alberta rules)