The ins and outs of locked-in accounts

When it comes to retirement, there are several types of accounts available, each with its own purpose and acronym. RRSPs, RRIFs, LRSPs and LIRAs all play a role in helping Canadians save and manage their retirement income. While RRSPs and RRIFs are widely recognized, locked-in retirement accounts (LIRAs) are often less familiar. This article explores what LIRAs are, how they work, and what to consider if you need to unlock one.

What is a locked-in account?

If you’ve left your job and were part of your former employer’s registered pension plan (RPP), you’ll need to decide what to do with your pension plan funds. If you chose to receive either a lump-sum payment or the commuted value from the employer pension, some or all of the amount might be subject to locking-in provisions. This means you might need to transfer part or all of the funds into a locked-in account, which is governed by the relevant federal or provincial pension legislation. These rules are intended to maintain the funds for retirement. 

A locked-in account is a type of retirement savings account that restricts withdrawals until you, as the account holder, reach retirement age. The funds deposited in these accounts must come from an employer pension or another locked-in plan.¹ You can’t contribute to these accounts personally, and you can’t withdraw the funds until retirement, except under certain circumstances.

There are three types of locked-in accounts (which we’ll collectively refer to as “locked-in accounts” throughout this article):

1. Locked-in retirement accounts (LIRAs): This term is used for locked-in plans in all provinces, except Prince Edward Island (PEI).² These accounts are governed by provincial pension legislation.
2. Locked-in registered retirement savings plans (LRSPs): This term is used for locked-in plans governed by federal pension legislation.³
3. Restricted locked-in savings plans (RLSP): This term is used for federal employee locked-in plans governed by federal pension legislation. This includes employees in sectors like banking, telecommunications, Crown corporations and interprovincial transportation, among others.
    

What is the “locked-in” commuted value?

The commuted value is an amount that represents the present value of your future pension income payments if you had remained in the employer pension plan. When you choose to take the commuted value, all or part of this payment might be subject to locking-in regulations. This means all or some of the funds are transferred to a locked-in account, to ensure that they are used in retirement. The intention of an employer pension plan is to create a lifetime retirement pension, so having the funds in a locked-in plan helps make sure you can’t access them until you reach retirement age. Remember, the funds aren’t taxable until you receive income from the plan.

Any part of the commuted value that isn’t locked in can be moved to registered accounts, like an RRSP or TFSA, as long as there’s contribution room available. If you choose to get it in cash, keep in mind that it will be taxed.

What are the options when your plan matures?

Unlike RRSP funds, you can’t withdraw funds from a locked-in plan unless you choose a maturity option, or unlock some or all of the pension funds under certain unlocking rules. You have to choose a maturity option by December 31 of the year you turn 71, similar to an RRSP. Also similar to how an RRSP is converted to a RRIF, locked-in accounts are converted to specific types of income fund accounts, depending on their jurisdiction, and you’ll need to withdraw a minimum amount each year. 

Life Income Fund (LIF)

LIFs are registered retirement income funds (RRIFs) bound by pension laws. The calculation for the LIF minimum payment is identical to the minimum RRIF withdrawals. You don’t have to take out a minimum payment until the year after you set up your LIF.

There’s a cap on how much you can withdraw from a LIF each year, and this maximum limit depends on where you live.⁴ Here’s a rundown of the rules by jurisdiction:

In certain jurisdictions the maximum payment is prorated based on the months remaining in the current year. Any part month is equal to a full month. There is no proration in AB, BC, MB or NB.
 

Restricted Life Income Fund (RLIF)

RLIFs are a maturity option for RLSPs, with the same minimum and maximum limits and restrictions as a federal LIF. With an RLIF, you can unlock up to 50% of the value if you are 55 or over within 60 days of transferring funds to the RLIF. If you are under 71 and don’t need an income stream from the RLIF, you can transfer the funds to a RSLP.
 

Locked-in Retirement Income Fund (LRIF)

LRIFs are only available in Newfoundland and Labrador.⁵ The funds from your pension or LIRA can be transferred to an LRIF when you turn 55, or earlier if your pension plan allows.

Similar to a LIF, an LRIF lets you access your locked-in funds within certain minimum and maximum levels. The calculation for the minimum withdrawal is the same as for LIFs. The maximum payment you can get from an LRIF is the greater of these options:

1. The amount of the investment earnings, including any unrealized capital gains or losses, earned from the time the LRIF was set up to the end of the most recent fiscal year. For funds transferred from a LIF, the investment earnings, including any unrealized capital gains or losses, made in the LIF in the last complete fiscal year, minus all income taken from the LRIF.
2. The investment earnings, including any unrealized capital gains or losses, of the LRIF from the previous fiscal year.
3. If the payment is being made in the fiscal year the LRIF was set up or the next year, 6% of the LRIF’s fair market value (FMV) at the start of that fiscal year.
4. The minimum payment.

You can also receive the maximum payment, but it’s prorated based on the number of months left in the year. If it’s a partial month, it still counts as a full month.
 

Prescribed Retirement Income Funds (PRIF)

PRIFs are something you can look into if you’re in Saskatchewan and Manitoba. In Saskatchewan, you need to be at least 55 years old (or at your plan’s early retirement age) to be eligible for PRIFs, and you can transfer your entire locked-in plan into one. Manitoba has a similar setup, but you can only transfer up to 50% of your LIF balance if you’re 55 or older.

There are no maximum withdrawal limits on PRIFs, so you could take out as much as you need each year. However, there are still minimum withdrawals required, just as with a LIF. Keep in mind that you can’t convert a PRIF into a regular RRIF.
 

How can you unlock your plan?

You may be able to withdraw funds from your locked-in plan that exceed the maximum, or unlock your plan in special circumstances. Keep in mind that the amounts that you unlock will be taxable in the year you unlock them, unless you transfer the funds to an RRSP or RRIF. Here are some circumstances under which you might be able to unlock all or a part of your plan:

1. shortened life expectancy
2. financial hardship
3. small plan balance
4. non-residency
5. special one-time unlocking

The rules for unlocking will depend on your plan jurisdiction. You might also need your spouse’s consent to unlock funds. Remember, funds in a locked-in plan are usually protected from creditors, but if you unlock your plan, you could lose that protection.
 

How do life events affect your locked-in accounts?

Marriage breakdown

Division of assets as part of a divorce can be tricky. Locked-in accounts are not protected assets in these situations. If you’re going through a marriage breakdown, know that your locked-in funds might be split with your spouse based on the rules in your pension legislation. These funds usually stay locked in, and your spouse will have to follow the same rules to access them. Also, if you get any locked-in funds from a former spouse, you may be able to name a beneficiary for those funds.

Death

If you haven’t named a beneficiary for your locked-in account, the FMV of the plan at the time of death will be taxable on your final tax return, and the funds will go to your estate. There are two types of beneficiaries for locked-in plans: qualifying and non-qualifying. If a non-qualifying beneficiary inherits the plan, the FMV at the time of death will be taxable on your final tax return, and any growth after death will be taxable to the beneficiary. Generally, your spouse or common-law partner must be the beneficiary of your locked-in funds. If you want to name someone else, and if the governing legislation allows it, your spouse or common-law partner must sign a waiver form to give up their right to your locked-in funds. If you don’t have a spouse or common-law partner, you can name any beneficiary you like.

A qualified beneficiary includes a spouse, common-law partner, financially dependent child or grandchild. The plan may be taxable to the qualified beneficiary on your death if it isn’t transferred to a registered account or used to purchase an annuity on a tax-deferred basis.

What are the federal and provincial rules governing locked-in accounts?

When you leave your job, the pension legislation that governs your plan will determine your options. This legislation also applies to locked-in plans and can affect things like your withdrawal limits, your ability to unlock the plan in certain situations and what happens to the funds if your marriage breaks down. The table below summarizes key points of each pension legislation.

In summary

If you’re considering leaving your job and have a pension plan from your employer, it’s important to consider the ins and outs of locked-in plans and how they might apply to you. If you are nearing retirement and have a locked-in account, it might be time to review your unlocking options. Remember, the rules will depend on your locked-in accounts’ jurisdiction.

¹ Generally, these plans are governed by the same pension legislation.

²  PEI does not have pension legislation in place that deals with locked-in accounts. PEI residents should refer to their specific pension plan documentation for guidance.

³  The territories – Northwest Territories, Nunavut and Yukon – fall under federal pension legislation, as they do not have their own specific pension legislation.

⁴  There is no longer a maximum withdrawal limit in Quebec (QC).

⁵ These accounts were previously available in Alberta, Ontario and Manitoba; however, they can no longer be opened. While accounts were transferred to LIFs in Alberta and Manitoba, existing LRIFs in Ontario are now subject to the rules for Ontario LIFs.

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