A LIRA or Locked-In Retirement Account is an account that holds on to your stacked pension funds in a company that you have worked for previously. It is your contribution to the company pension fund. This is for the time when you are retired or have left the company for some reason. You can deposit all your previous company’s pension funds under one account – Locked-in Retirement Account in Canada.
If you work for a short period in a company, this pension is not a very large amount and can also be acquired in cash as you depart from the workplace. However, in case you have deposited a big amount, you need to put that in a Locked-in Retirement Account in Canada. That is because the government advises that these funds be used for their intended purpose and not for whims or any other use.
Hence, to fulfill that purpose, your pension will be deposited into LIRA where it will grow as tax-deferred income until you use it at the time of your retirement. The age at which you are allowed to use the money in LIRA varies from province to province. The standard age in most of the provinces is 55 years. While, in Alberta, it is set at 50 years.
This account is also called the LRSP or RRSP. To understand the context better, let’s compare RRSP and LIRA first before moving ahead.
LIRA Versus RRSP
Here are the points where LIRA and RRSP are similar.
- Investment holdings: The assets that you invest in both of these accounts are similar. For example ETFs, GICs, mutual funds, stocks, etc.
- Retirement savings: Both of these accounts are meant to store funds for savings.
- Self-managed accounts: You can invest your pension money at your discretion and manage it accordingly in both accounts.
- Beneficiary designation: You are allowed to assign a beneficiary to your account, so the assets are passed on to them if you pass away.
- Compulsory conversion: You have to convert the RRSP or LIRA account to different accounts like Annuity, LIF, RRIF, etc. at the age of 71, to withdraw or receive your income.
Here are the points where LIRA and RRSP differ.
- Withdrawing money: RRSP allows you to withdraw money any time, even via the Home Buyers Plan and Lifelong Learning plan. On the contrary, LIRA does not allow you to withdraw the money until you reach the eligible age. The exceptions to this rule include non-Canadian residency, financial hardship, shortened life expectancy.
- Contributions: An RRSP account allows you to contribute until the age of 71 if you are willing to do so. On the other hand, LIRA does not allow you to add anything to the company pension. However, you can consolidate various LIRA accounts if they are under the control of the same rules.
How to Convert LIRA into Regular Retirement Income?
If you are 55 years of age or 50 in Alberta, here are the accounts that you can turn your Locked-in Retirement Account in Canada into.
- Life Annuity
- Locked-In Retirement Income Fund (LRIF)
- Life Income Fund (LIF)
- PRRIF or Prescribed Registered Retirement Income Fund
1 Life Annuity
A life annuity is an insurance instrument that guarantees to pay you a long-term income for a lifetime. To purchase this product, you can use LIRA assets after the age of 55, which is allowed in most provinces.
As you buy a life annuity, the company that offers you the product will mention the income that you stand to get from this investment on the basis of your gender, age, and prevalent interest rates. This amount is fixed and is not affected by market conditions.
2. Locked-In Retirement Income Fund (LRIF)
This is a retirement fund that is locked in just like the LIF, except this is not applicable in Labrador and Newfoundland. This is because in these states you are required to use your LIF assets to buy an annuity at the age of 80, whereas LRIF is not governed by this rule. The calculation of maximum annual income for LRIF is also different.
This is also called the Prescribed Retirement Income Fund which is applicable in both Manitoba and Saskatchewan. This has uncanny similarities to the LIF. It does not have any maximum annual withdrawal cap. In Manitoba, you are allowed to transfer around 50% of your funds to LRIF or LIF. While in Saskatchewan, you are allowed to transfer the 100% sum.
4. Life Income Fund (LIF)
If you are an owner of the RRSP account, as you reach age 71, you can take out your funds, and transform them from RRSP into an RRIF or buy an annuity. Such guidelines also apply to holders of LIRA. They can convert it into LIF or other accounts. LIRA’s funds have the boundation that they cannot be withdrawn.
You can do monthly, weekly, quarterly, annual, and semi-annual payments to your LIF where you have to pay the taxes for any income that you receive. Similar to RRIF, you can invest in LIF with investment assets, depending upon the degree of risk that you can take.
What Other Options Should You Take into Account?
With enough knowledge, you can customize your income from Locked-in Retirement Account in Canada, just like an RRSP account.
Here are some of the LIRA/LIF funds that you can benefit from based on your age and concerns.
Provincially Regulated Pensions: Various provinces let individuals access 50% of the LIRA deposit and the RRIF and RRSP accounts, where the maximum limit is null.
Federally-regulated pensions: It lets individuals access 50% of the LIRA deposit and the RRIF and RRSP accounts, where the maximum limit is null.
Combine options: You can alter the options and benefit from what different accounts will be offering to you. For example, you can access 50% of the funds in LIRA. You can put them in RRIF, and buy an annuity from what is left.
Current interest rates: The income that you pay for an annuity is dependent on the prevalent interest rate. If the interest rate is low, you will also receive a comparatively low annual income.
Investment management preference: If you want to have control over the investment options in which your assets are investments, LIF, PRIF, or LRIF let you choose where you can invest the funds. However, an annuity is managed by the insurer, and thus, you have no say in the investment decisions.
Income variations or steady income: If you want to withdraw varying sums as per your financial needs over the year, LIF, PRIF, or LRIF is a better option. The income of annuity always remains fixed.
The Bottom Line
“The question isn’t at what age I want to retire, it’s at what income.”
– George Foreman
This quote clearly suggests the importance of having your finances in place before your retirement. It is always better to start early and save money in different financial instruments which can help you build wealth in the long run. Retirement is considered the second inning of life, so why stress when you can achieve your dreams and have time to do anything you want. Plan well, enjoy well, retire well!