Guide to Locked-in Retirement Account (LIRA) in Ontario

Welcome to our guide on Locked-in Retirement Accounts (LIRA) in Ontario! Whether you’re planning for retirement or just curious about different investment options, we will cover everything that you need to know about LIRA’s. LIRA’s are great accounts to help you maintain your previous jobs pension or a pension plan from a former spouse, they can be used to invest to add more income to your pension, but the main catch is that they are locked up until you retire and convert it to a Life Income Fund (LIF), a Locked-in Retirement Income Fund (LRIF) or an annuity. Though there are rare cases of being able to unlock your LIRA, there are also other rules surrounding a LIRA. We will cover the pros and cons, how a LIRA works, and also how the LIRA compares to the Registered Retirement Savings Plan (RRSP).

In this article: 

• What is a Locked-in Retirement Account (LIRA)?
• Benefits of a LIRA
• What is a Life Income Fund (LIF)
• What is a Locked-in Retirement Income Fund (LRIF/RRIF)
• How does a Locked-In Retirement Account (LIRA) work?
• Pros and cons of a Locked-in Retirement Account (LIRA)
• Unlocking a Locked-in Retirement Account (LIRA) in Ontario
• Unlocking a Locked-in Retirement Account (LIRA) if you are a Non-Resident
• How to transfer your Group Pension
• Transferring your prior pension out of OMERS
• Transferring your prior pension out of HOOPP
• Locked-in Retirement Account eligibility
• Locked-in Retirement Account (LIRA) vs Registered Retirement Savings Account (RRSP)
• Investing with a Locked-in Retirement Account (LIRA)
• How to withdraw money from a Locked-in Retirement Account (LIRA)
• Frequently Asked Questions (FAQs) about Locked-in Retirement Accounts (LIRA)?

What is a Locked-in Retirement Account (LIRA)? 

The locked-in retirement account (LIRA) is a type of registered retirement savings plan (RRSP) that holds money transferred from a pension plan from a former employer of yours, from your ex-spouse, or a surviving spouse. It is designed to provide individuals with a way to save for retirement while preserving the funds accumulated in a former employer’s pension plan. The funds in the account remain locked until your retirement, and must be transferred into a life income fund (LIF), a locked-in retirement income fund (LRIF), or the LIRA funds can be used to purchase an annuity to be accessed. You will then receive payments throughout your life when you are retired. The rules regarding LIRA accounts are regulated by the government and vary from province to province. This level of control and flexibility is essential for long-term financial planning and ensuring a comfortable retirement.

What is a Life Income Fund (LIF)?

A life income fund (LIF) is a type of registered retirement income fund (RRIF) that can be used to hold locked-in pension funds and other assets for eventual payout as retirement income in Canada. A lump sum withdrawal from a life income fund is not possible. The fund’s owners must use it in a way that ensures retirement income for the rest of their lives. The minimum and maximum withdrawal amounts for RRIFs, which include LIFs, are specified in the Income Tax Act each year. If you worked for a company with an employer pension plan and were eligible to receive your pension funds before your retirement, those funds would have been “locked-in” under provincial pension legislation and would not be available in cash until you reached the retirement age specified in that province’s pension legislation.The money was put into a Locked-In Retirement Account (LIRA). A LIRA can be converted to a LIF once you reach normal retirement age. One of the benefits of a LIF is the potential for investment growth. Unlike other retirement income options, such as an annuity, a LIF allows you to keep your funds invested in a variety of assets, such as stocks, bonds, and mutual funds.

What is a Locked-in Retirement Income Fund (LRIF) 

LIFs and LRIFs are tax-advantaged accounts that pay out the accumulated value of a locked-in RRSP, a locked-in retirement account (LIRA), or locked-in amounts under a registered pension plan (RPP). This money, unlike the money you put into your personal RRSP, must be used to fund your retirement. These accounts are intended to provide a long-term source of income. However, there are some limitations. You won’t be able to cash out your LIF or LRIF in most cases. The government establishes a minimum and maximum amount of money you can receive from your LIF or LRIF each year.  You can, however, control your investment options and payment amounts within this range. One of the benefits of a LRIF is the potential for tax savings. By keeping your funds in a LRIF, you can defer paying taxes on the income until you actually withdraw it.

Two major differences between LIF and LRIF accounts are: 

• In certain provinces, remaining funds in a LIF must be converted to a life annuity when you turn 80 years old. However, the LRIF doesn’t have to be converted to a life annuity.
• The maximum amounts are different between the LIF and the LRIF.

With a LIF, retirees have more control over how their funds are invested, as well as how much income they receive each year. LRIFs, on the other hand, often have more restrictions on how the funds can be invested and how much income can be withdrawn each year.

How does a Locked-in Retirement Account (LIRA) work? 

Typically, a Locked-in Retirement Account works when you leave a job that had a pension plan, or funds may have been split from a divorce, and your funds might have been transferred into a Locked-in Retirement Account so that you do not have access to it until you are retired. This account can also be made at your discretion if you want, so that the money is tucked away safely for when you retire. To access these funds, you will first need to be retired, then you will need to transfer the funds into a Life Income Fund (LIF), an annuity, or a a Locked-in retirement income fund (LRIF).

Pros of having a Locked-in Retirement Account (LIRA)

Cons of having a Locked-in Retirement Account (LIRA)

Unlocking a Locked-in Retirement Account (LIRA) in Ontario

To unlock a LIRA in Ontario there are specific rules and regulations that apply that you must follow, these rules differ province to province so if you’re reading this blog and not from Ontario please take a look at the rules regarding the LIRA in your province. 

In Ontario, there are five financial non-hardship categories that are considered when unlocking your LIRA. These are the following categories that are considered: 

Unlocking a Locked-in Retirement Account (LIRA) if you are a Non-Resident

Non-residents of Canada can unlock their locked-in account, but they may need to meet specific criteria and follow specific procedures. The process for unlocking a locked-in account for a non-resident of Canada may vary depending on the specific circumstances and the financial institution holding the account. In general, it may require proof of non-residency and a written request to the financial institution.

There may be penalties for unlocking a locked-in account for a non-resident of Canada, depending on the specific circumstances and the financial institution holding the account. It is important to carefully consider the terms and conditions of the account before making any changes.

Yes, there may be tax implications for unlocking a locked-in account for a non-resident of Canada. Non-residents of Canada may be subject to Canadian income tax on their Canadian-source income, including withdrawals from a locked-in account. It is important to consult a professional for guidance on the specific tax implications.

There are other reasons that you may also be able to unlock your Locked-in Retirement Account in Ontario. These reasons have to do with financial hardships you might encounter if you don’t access your LIRA. Here are the financial hardships categories that will allow you to unlock your LIRA Ontario: 

• Low income or expectation that your income will become very low 
• Potential foreclosure of your home
• Potential of being evicted by your landlord due to late or missed payments
• Security deposit, or first month’s rent
• High medical bills or disability related expenses

Remember to be aware of the laws and regulation regarding LIRA legislation in your province, and always reach out to an expert financial advisor to find out what is best suited for your financial situation and plan.

How to transfer your Group Pension

Many people have had a great group pension job at the job that they have recently left, now luckily with a LIRA you can transfer your group pension. There are just a couple of important step that you must follow in Canada in order to ensure you transfer your group pension properly.

Pension Transfer Agreement (PTA)

By transferring funds from your former employer’s pension plan to your new employer’s pension plan in an amount equal to the actuarial value of the benefits earned in relation to your pensionable service credits, you can increase your pension assets through a pension transfer agreement (PTA).

You might be able to transfer your pensionable service credit to your new pension plan when you leave one employer and start working for another while also enrolling in their pension plan. One way to carry out such a transfer is with a PTA. A PTA must have been signed between the Government of Canada and an outside employer in order for either party to take part in such an arrangement.

Alternatives to PTA

If your former employer is not one of the organisations with whom a PTA is listed, then the PTA may not be a legally binding contract. You must get in touch with your former employer to see if they are interested in negotiating a PTA with the Government of Canada if there is no agreement in place and you want to pursue the PTA option. You might want to look into the possibility of a Service buyback package as an alternative to a PTA (also known as elective service).

In order to increase your amount of pensionable service under the federal public service pension plan, you may enter into a legally binding agreement known as a service buyback. It might also cover any prior time spent working for the federal government or any pensionable employment with another employer.

Transferring your prior pension out of OMERS

There are plenty of options out there if you are leaving your job which has a pension with OMERS, this transfer can be done and these are your options:

• Receive a future stream of lifetime retirement income by sticking with OMERS for your pension. After turning 55, you can begin receiving a pension at any time;
• If you start working for a new OMERS employer, combine your old OMERS record with your new membership;
• Transfer your benefits to a different Canadian registered pension plan;
• Transfer your OMERS benefits’ commuted value to a locked-in retirement vehicle at the financial institution of your choosing.
• The OMERS pension’s present value, computed at a predetermined rate, is the commuted value.

Regardless of your circumstance and the direction that you want to go, our financial advisors will be happy to help you throughout this difficult process!

Transferring your prior pension out of HOOPP

There are three options available to you if you decide to leave your HOOPP employer before your pension has started:

• Defer your pension or keep it with HOOPP
• Change to another defined benefit pension plan
• Transfer to a registered retirement plan, annuity or a locked-in retirement account

Once you know that you are eligible to switch your pension out and meet all the requirements remember:

• When switching to another defined benefit (DB) pension plan. If your new employer has a DB pension plan and you are under 65, you might be able to transfer the worth of your HOOPP benefit into it. When a tax-free transfer is possible, we will, if necessary, collaborate with you and your new employer’s plan administrator.
• Transfer to a defined contribution (DC) pension plan or locked-in retirement account. You can transfer the value of your pension, if you are under 55, to a locked-in retirement account (LIRA) or, if your new employer has one, to their DC pension plan.

Locked-in Retirement Account (LIRA) Eligibility 

You must be 71 years old or younger to unlock a LIRA account, but to open a LIRA account you must have an employee-sponsored pension from a former employer. If you have an employee-sponsored pension from a former employer you can decide to let them hold your pension until your retire, or you can transfer the pension to a LIRA account and safeguard it with a financial institution and use it in some cases, or invest the amount in the fund with the help of a financial planner. You are also eligible to have a LIRA account if you have a pension plan set up with your former spouse or a deceased spouse. Additionally, there may be restrictions on the amount of funds that can be withdrawn each year, as well as limitations on how the funds can be invested.

Locked-in Retirement Account (LIRA) vs Registered Retirement Savings Plan (RRSP)

Both of these accounts are great for retirement planning, and although the Locked-in Retirement Account (LIRA) and the Registered Retirement Savings Plan (RRSP) have slight similarities, there are some bigger differences between the two. It is important to know what is best for your retirement plan and what is better suited for you. The primary difference between the RRSP and the LIRA is that in a RRSP you make contributions yourself whereas in a LIRA it is from an existing pension plan from a former employer or spouse. 

Investing with a Locked-in Retirement Account (LIRA)

The availability to invest with a LIRA is a very attractive feature of the LIRA. There are strict rules regarding investing your LIRA and it is best to contact a financial advisor to find out what your investment eligibility is. Typically, an LIRA can be used as an investment vehicle like an RRSP or TFSA, meaning that you are able to invest with a LIRA in GICs, ETFs, mutual funds, stocks and bonds. Remember that you are not able to contribute money into the LIRA like you would with an RRSP or TFSA, and you cannot withdraw any income earned on the LIRA investments but they can be added to your LIRA for future investment and access.

Consider factors such as historical performance, fees, and risk profiles when selecting investments for your LIRA. Diversification is also crucial, as it helps mitigate risk by spreading investments across different asset classes and industries. By diversifying your LIRA holdings, you can potentially enhance returns while minimizing the impact of any individual investment.

How to withdraw money from a Locked-in Retirement Account (LIRA)

As listed earlier, opening a Locked-in Retirement Account (LIRA) in Ontario requires you to meet specific requirements to be considered eligible for unlocking your LIRA. To fully understand your eligibility and to find out if it is right for you to unlock your LIRA without any violations, you should contact a financial advisor to help guide you through the process. 

Generally, people in difficult financial situations may be able to withdraw funds from their LIRA account. Those who have low incomes, are facing foreclosure on their home or eviction from a rental property, require cash to pay the first and last month’s rent on a new lease, or are facing significant expenses due to medical problems or a disability are eligible. You may be allowed to withdraw funds early if you have a shortened life expectancy (supported by a doctor’s report). People who require cash to pay child or spousal support may also withdraw funds. If the LIRA account has a small balance, you may be able to withdraw the entire balance. 

Another circumstance in which individuals may be eligible to withdraw funds from a LIRA before retirement is disability. If you become disabled and are unable to work, you may qualify for a disability withdrawal from your LIRA. The criteria for disability withdrawals vary by province and may require medical documentation to support your claim.

Frequently Asked Questions (FAQs) about Locked-in Retirement Account (LIRA)

Wondering if the Locked-in Retirement Account is right for you? 

The LIRA is a great account for anyone who has an existing pension plan and would like to safeguard it, invest with it, and keep it tax-deferred for the long run. This account is for those who want to lock away their pension so it is not at risk of being spent, out of sight, and out of mind can ensure that in your retirement you have peace of mind! If you want to learn more about the Locked-in Retirement Account check out our LIRA page which has answers to all of your questions about LIRA’s in Ontario.

At Protect Your Wealth, we’ve been providing expert advice for all types of life insurance, and retirement and investing planning, since 2007. As your Life Insurance broker and financial planner, we work with you to create a personalized plan for your family or business that covers and meets your needs.

Contact Protect Your Wealth or call us at 1-877-654-6119 to talk to an advisor today. We’re proudly based out of Hamilton, and service clients anywhere in Ontario, British Columbia, and Alberta, including areas such as Guelph, Abbotsford, and Medicine Hat.