Insights & Resources

With so many types of financial accounts and acronyms, it is hard to keep track of which one is which. In this article we will be reviewing specifically the Locked In Retirement Account – or LIRA for short – what it is and whether you need one. 

If you are employed by a company and you participate in a pension (either defined benefit or defined contribution) you may have the option to commute your pension, if or when you leave that employer. To commute your pension means to take it with you as opposed to leaving it with your company to manage and invest (or whoever they have hired to do so). 

For example, if you contribute to a pension at your current employer and leave to go to a new job, or are let go, you will most likely receive a pension package from your employer where they ask you what you want to do with your pension – either:

1. leave the pension with your ex- employer for them to manage or
2. to commute it (transfer it) to wherever you hold your other investment accounts and have it managed there. (Under this scenario you will be provided with a value that is eligible for transfer to a LIRA account. Your financial advisor will be able to assist in having the pension transferred to a LIRA account.)

What is a LIRA?

A Locked In Retirement Account (LIRA) is similar to most other investment accounts – you can invest the cash and there may be some tax savings or tax implications. Within your LIRA, you can buy stocks, bonds, mutual funds, ETFs, GICs, etc. Investments in the LIRA can grow tax deferred, and if you invest smartly, your account will grow in value.  

However, unlike some other investment accounts, the money in the LIRA is really meant to ONLY fund your retirement. In fact, there are provincial and federal rules around when and how much you are entitled to take out of the account each year. 

For example, under most circumstances you can only begin to withdraw from the LIRA when you are at least age 55. You can elect to start making regular withdrawals from the account at age 55 or older. However, even if you don’t need the money, you MUST start withdrawing funds on an annual basis beginning the year you turn 72.

Once you begin withdrawing, the account is converted into a Life Income Fund (LIF) and you will continue withdrawing from the account each year. Imagine a tap without an off switch; once the water flows, you can’t stop until it has run dry. 

How much are you allowed to withdraw each year? 

The government sets out annual minimums and maximums that you are allowed to withdraw each year. For example, a 65-year-old who has elected to start withdrawing from their LIRA (now LIF) would need to take out at least 4% of the portfolio value, but no more than 7.38%.  Portfolio value is based on the value of the account on January 1 of each year.

To put this in perspective, a 4% withdrawal on a LIRA (LIF) that had a value of $250,000 on January 1 would be $10,000. 

With each passing year, the minimum and maximum withdrawals are increased slightly. For example, an 85-year-old would need to withdraw a minimum of 8.51%, but no more than 22.40% of the portfolio value of the account from January 1 that year. 

While the rules are strict around when and how much you can withdraw from your LIRA, keep in mind, these rules are similar to those of your pension plan if you had left the money there and not commuted the pension to a LIRA.  As well, withdrawals from either a pension or a LIRA (LIF) are taxable. 

Now, the rules around LIRA withdrawals are not so strict that you would have no hope in accessing them should you really need them. There are some exceptions to the withdrawal rules that allow you to access more of the money sooner than what the usual rules dictate. Some of these exceptions include:

• Shortened life Expectancy
• Small Balance below a certain threshold- varies by province
• Becoming a non- resident
• Financial hardship

Your financial advisor can work with you to determine if you are eligible for any of these categories. 

Do I need a LIRA? 

First off, not everyone will be eligible to even hold a LIRA. Remember, a LIRA is just a pension that you and/or your financial advisor are responsible for managing. Therefore, if you do not have a pension you will never have a LIRA (excluding one obtained through divorce or death of a spouse which, while possible, is outside the scope of this article). 

If you have a pension and have left your employer you may be left wondering if you should commute your pension to a LIRA. Things to consider when making this decision:

1. Is the pension a defined benefit or defined contribution plan? Is it possible to achieve a higher rate of return and greater withdrawals in the future if you commute your pension?
2. Who has your company hired to manage your pension? Do they have a long successful track history?
3. Does the company managing your pension know your risk threshold and the rest of your financial situation?
4. Are most of your retirement savings locked up in your pension? Do you foresee needing to take advantage of one of the withdrawal exceptions?
5. Are current interest rates expected to rise?

Many Canadians rely on their pensions to fund their retirement. However, in some instances it may make sense to commute the pension to a LIRA to try and achieve higher returns and get more out of your pension. If you are unsure what to do with your pension, we can help you determine whether to commute it or leave it where it is. Contact us today for an unbiased complimentary review of your pension.