Unlocking LIRA and Pension Money
Written by Scott Wallace •
Recently I was working with a client of mine who is now entering a phase of his retirement where he wants to start spending the money in his Locked In Retirement Account or LIRA. We started the process of unlocking LIRA money which made me think it might of benefit if we did a quick review on the Unlocking Pension provisions in Alberta and how it all works.
Related article: Differences between LIRAs and RRSPs
As of November 2006 a member of a LIRA, who is at least 50 years of age, can unlock up to 50% of the value of that LIRA and move it to their RRSP or RRIF. Prior to 2006 if you were in a LIRA you had no option except to start receiving income from a Life Income Fund (LIF) or Life Annuity. You can also unlock 50% of your pension fund if you are about to leave a pension plan and are about to transfer the money out to a LIF or Life Annuity.
You are unable to unlock LIRA money if you have already started to receive an income from your plan. Here’s an example:
Let’s say you have $500,000 Commuted Value of Pension Plan or LIRA. $250,000 (50%) of Commuted Value that can be transferred to RRSP or RRIF only if the other $250,000 is going to a LIF or Life Annuity. The other 50% cannot stay in the pension or be moved to a LIRA. It must move to an income vehicle.
What is a LIF?
A LIF is a RRIF with limits. Unlike a RRIF payment which only has a minimum payment requirement and no maximum requirement and LIF has the minimum payment but also a maximum payment limit. A person with a RRIF could cash it all in at Day One of retirement. A LIF on the other had has limits preventing that from happening. This provides a form of spousal protection.
Related article: Understanding minimum incomes for RRIFs
A LIFE ANNUITY will provide the retiree with an income for life. Much like a Defined Benefit pension plan the Life annuity makes sure that the funds in the annuity will be there for as long as the person receiving the income is alive( or as long as last surviving spouse if joint).
Related article: Everything you need to know about Life Annuities
A case example
The 50% that has been unlocked can be moved to a RRSP or RRIF. Why is this beneficial? It gives the retiree more flexibility. The maximum income restriction of a LIF are removed on this amount of money which means the income can be more in line with what the retiree wants in their retirement. Here’s another example:
Mr. Smith (Age 55) has $500,000 in LIRA. Mr Smith unlocks 50% and transfers $250,000 to his RRSP. The other $250,000 will go into either:
1. LIF paying a minimum annual payment of $7143 per year in year one. This payment will change year to year based on the return on the investment and a formula calculation.
2. LIFE paying a maximum annual income of $17,134 per year in year one. This payment will change year to year based on the return on the investment and a formula calculation.
3. Life Annuity (joint) will pay $10,987.03 per year for life of both husband and wife.
Remember when unlocking the 50%, the money that a transfer to a LIF or Annuity has to start paying you right away. The money going to the RRSP does not have to go to a RRIF immediately. It can stay in a RRSP until December 31st in the year in which Mr. Smith turns 71.
If you have a LIRA or are about to leave a pension plan you will be notified of your options including the unlocking unless your pension plan has provisions where you are within a certain period of hitting the full retirement age.
Pension legislation is provincially regulated. In Ontario, information can be found through Financial Services Commission of Ontario (FSCO). they do have some unlocking provisions for financial hardship (http://www.fsco.gov.on.ca/en/pensions/financial_hardship/Pages/Financial_