The days when our parents or grandparents worked for the same employer their entire career have long passed. Now, people change jobs and employers often and this has increased the need to move one’s pension savings from the old company. That usually requires you to open a locked in retirement account (LIRA) or a locked-in registered retirement savings plan (Locked-In RRSP). The reasoning for having this plan locked-in is to make sure these funds are used for your retirement – as though you were getting a company pension. Once you take out those pension savings, it is up to you to invest the money for your future, as the government rules prevent you from cashing it in.
Many more Canadians now have locked-in RRSPs, which later are switched into locked-in accounts such as a Life Income Fund (LIF), when you want to start receiving an income stream from the plan.
The locked-in RSP has a different name if it is governed by provincial, as opposed to federal, pension legislation. Most provinces call it a Locked-in Retirement Account or LIRA. Territories, that do not have pension legislation use the federal legislation. Prince Edward Island is the only province that does not have active pension legislation and does not simply use the federal legislation. For the purpose of this article I will use the federal term “Locked-In RRSP."
There is a lot of confusion over locked-in accounts because, unlike a pension, it is held under a person’s name in an account where they can see and manage the investments. Remember, the locked-in account is designed to be used when you retire, and to produce income, in lieu of the income normally received from a company pension.
Here are 10 things you should know about locked-in RRSPs:
1. The assets within the account can be invested as though it was in a regular registered savings plan (RSP). You can invest the money in bonds, GICs, mutual funds, stocks, exchange-traded funds and other investments.
2. U.S. stocks of companies that are headquartered in the U.S. and pay a dividend are not subject to non-residency withholding taxes. We have a tax treaty with the U.S., and any U.S. dividends that are paid into accounts deemed for retirement purposes are excluded for non-resident withholding taxes. Note that this does not apply to tax-free savings accounts (TFSAs).
3. Locked-in RRSP are regulated by the Income Tax Act as either federal or provincial pension legislation. This is mainly determined by the pension legislation that was applied to the company pension where the funds were derived.
4. Funds deposited into a Locked-In RRSP must come from a company pension or another locked-in plan. You cannot make contributions into a locked-in account.
5. Unlike funds in a regular RRSP, funds in Locked-In RRSPs are not available for withdrawal except for specific circumstances. The opportunity for early withdrawal of funds is subject to the pension legislation of the province governing the account, not all provinces allow this. Two examples of conditions that allow for special withdrawals from locked-in plans are financial hardship and small plan balances. You would have to apply to unlock the funds, stating the specific reason for the request. Check with the institution holding your account to find out if you can apply or not.
6. Once you turn 71, your federally regulated Locked-In RRSP must be transferred into a LIF or a Restricted Life Income fund (RLIF). For provinces that have LIRAs, the maturity option is to move the plan into a Life Income Fund (LIF). There is a mandatory minimum amount you have to withdraw each year and it is taxable as income similar to a Retirement Income Fund or RIF. There is also a restriction on the maximum annual amount you can take out.
7. You can gradually unlock your LIF by withdrawing the maximum allowed, receiving the minimum amount in cash, and transferring the difference into a regular RSP or RIF for future withdrawal. This is effectively unlocking some of the funds so you can choose when exactly you take out that taxable income.
8. Maturity options and the earliest age you can start getting payments from a locked-in RRSP/LIRA vary from province to province and if covered by federal legislation. Most jurisdictions allow you to convert at age 55, but a few allow it at an earlier age. In some cases, there may be the opportunity for you to unlock part of the assets when converting to a maturity option.
9. You can name a spouse as the beneficiary/successor annuitant to your Locked-In RRSP thereby avoiding the probate cost and income tax. If you name a beneficiary who is not your spouse the plan will still be subject to income tax, but can pass on without probate.
10. Another maturity option is to purchase a Life Annuity. This gives you a fixed interest rate for life. This is most desirable when interest rates are high. With today’s low interest rate environment there are probably better options for a greater return.
The terminology and rules governing a Locked-In RRSP/LIRA can be confusing and daunting. It is important for each person that has a locked-in retirement account to know the legislation that regulates the terms, conditions and maturity options.
It is important to consider future income needs, estate planning, tax planning and who is going to manage the investment. Remember, the income that is eventually paid to you from the locked-in account is, like any other retirement plan, taxed as income. It supplements other retirement income streams, such as Canada Pension Plan, Old Age Security or a RRIF, and is designed to provide you with financial support when you are no longer working.