When you leave a job, you’ll typically have retirement savings locked in through pension legislation at your place of work. You’ll usually have a choice between leaving the monies in your pension plan or transferring it to a locked-in retirement account (LIRA), which is essentially an RRSP which is locked-in until you reach a certain age, which varies according to provincial pension legislation.
Once you reach a minimum age (set by the province of residency, which is 55 years old in Ontario) you can start to receive income from this pension money by converting it into a Life Income Fund (LIF) or a Locked-in Registered Income Fund (LRIF). To be clear, monies cannot be withdrawn directly from a locked-in account – only through a Life Income Fund, Locked Retirement Income Fund or Life Annuity (which we’ll discuss below).
Locked-In Retirement Accounts (LIRA)
LIRAs are similar to an RRSP, but as the name suggests, are locked-in until retirement. Also note that once the plan is converted to a Locked-In Retirement Account, you cannot make further contributions to it.
From the time you reach 55 years of age, but no later than when you turn 71, you can convert your LIRA to either a life annuity, Life Income Fund (LIF), Locked-In Retirement Income Fund (LRIF) or a Prescribed Registered Retirement Income Fund (PRRIF, which is available in Manitoba and Saskatchewan since 2005). As we are in Ontario, we shall only focus on LIF and LRIFs.
Life Income Funds (LIF) and Locked-in Retirement Income Funds (LRIF)
The LIF or LRIF pays an income. There’s a maximum you can withdraw each year, which is intended to ensure that your money will last long enough to help support your retirement.
- You can hold many types of investments in LIFs and LRIFs, such as GICs, mutual funds, or segregated funds. You decide where to invest and can perform transactions within the plan.
- You have control over how much tax is withheld from the payments.
- You can name a beneficiary to receive your money after you die.
- There’s a minimum income you’re required to take out of the plan every year and a maximum you’re allowed to take from your plan. The maximums for LIFs are a bit different than for LRIFs.
- You can use money remaining money in a LIF to purchase a secure guaranteed income in a life annuity.
In Ontario prior to July 27, 2007, the distinction between a LIF and LRIF was that a LIF had to be converted to a Life Annuity when the owner turned 80 years old. This meant turning over the LIF funds to an insurance company, thereby giving up control of the capital and there are some drawbacks to this:
- You no longer have possession of your retirement funds – you’ve turned them over to the insurance company; and
- The LIF owner whose assets are in mutual funds or stocks and bonds must therefore pay close attention to market conditions as age 80 approaches in order to maximize the plan conversion value and subsequent annuity payments.
Subsequent to July 27, 2007 this age restriction was removed in Ontario.
On the other hand, a LRIF eliminates the requirement to convert the account to an annuity at age 80. Withdrawals can be based on the plans’ investment return from the previous year or on the same minimum permitted for RRIFs and LIFs. In Ontario, any unused withdrawal room from one year can be carried forward to future years. Therefore, this option is much more flexible than choosing a LIF.
A LRIF is available only if you have pension money that was contributed when you worked in Manitoba, Newfoundland and Labrador or Ontario. This type of plan cannot be opened prior to the age that you could receive normal pension benefits (which is 55 years old in Ontario).
What Is a Life Annuity?
It is an insurance product that features a predetermined periodic payout amount until the death of the annuitant. The reason why LIF and LRIF legislation was introduced was due to the concerns that direct conversion from locked-in monies (i.e., pension, LIRA) to a life annuity would result in the loss of estate value as the annuity payments will cease upon the death of the owner.
These products are most frequently used to help retirees budget their money after retirement. As mentioned previously, if a retiree has a LIF or LRIF, a Life Annuity must be purchased at age 80 – except in Quebec, New Brunswick, Nova Scotia, Alberta, Saskatchewan, Manitoba, British Columbia, Ontario and Federal, where a LIF has no maximum age restriction.
Difference between LIF/ LRIF and Registered Retirement Income Funds (RRIF)
Individuals who accumulated tax-sheltered savings that are not locked in by pension legislation (i.e., an RRSP) can purchase a RRIF. People with locked-in pension monies cannot purchase a RRIF because RRIF contracts do not contain a maximum withdrawal restriction. In order to comply with Ontario’s pension legislation, a LIF imposes measures that ensure that sufficient capital is retained in the plan for the eventual purchase of a life annuity.
Protection from Creditors and Bankruptcy
Pension funds [under s. 66(1)] and locked-in retirement accounts [under s. 66(2)] are exempt from seizure by creditors or a trustee in bankruptcy pursuant to the Ontario Pension Benefits Act. Life Income Funds are also exempt [Financial Services Commission of Ontario, Index L200-302, page 9].
The major exception to this rule is the claim of a former spouse under the Family Law Act with respect to support arrears and division of pension assets [s. 65(3) and s. 65(4)].
Withdrawals due to Hardship
The following information is from the website of the Financial Services Commission of Ontario. This only applies to pensions in Ontario.
Individuals who qualify under specific circumstances of financial hardship may apply to the Financial Services Commission of Ontario (FSCO) for special access to the money in their Locked-in Retirement Accounts, Life Income Funds, or Locked-in Retirement Income Funds. There are six qualifying circumstances for making an application to FSCO to withdraw money from your locked-in account based on financial hardship:
- Low income: If you apply in this category, your expected total personal income before taxes for the next 12 months must be less than $33,400 in the year 2012. This amount changes every year.
- Risk of eviction from your home: You (or your spouse) must have received a written demand from the creditor for money owed on a debt secured against your residence—for example, a mortgage, property lien, or property taxes. You must need money to avoid the risk of eviction.
- Risk of eviction from your rented residence: You (or your spouse) must have received a written demand for the payment of rent owed, and need money to avoid the risk of eviction.
- You need money in order to pay the first and last months’ rental deposits on a residence you wish to rent.
- You need money to pay for medical treatment for you, your spouse or any dependants of either of you. The medical expenses you claim cannot be covered by a provincial health plan, your private health insurance, or any other source. You may claim for expenses already paid or for expenses you will incur in the future. You must provide a doctor’s letter stating that the medical treatment is necessary.
- You need money for residential renovations, alterations or construction to accommodate the use of a wheelchair, or other needs related to a disability or illness. The illness or disability must affect you, your spouse or a dependant of either of you. The renovations or alterations can be made to your home or the dependant’s home. The money can also be applied to the cost of including features to accommodate an illness or disability in the construction of a new home. You must provide a doctor’s letter stating the renovations, alterations or construction are necessary to deal with an illness or disability.
If you are making an application based on financial hardship, you may be expected to use some of your assets to deal with the hardship. If you own eligible assets, the regulations require that their value be deducted from the amount of money that you are applying to withdraw from a LIRA, LIF, or LRIF. Once this has been done, the regulations also require that you qualify to withdraw at least $500 to deal with your financial hardship. FSCO cannot approve your application if you only qualify to withdraw less than $500. The same rules apply to any assets owned by your spouse. If you are making an application to help a financial dependant of either or both of you, the rules apply to the dependant’s assets as well.
However, many types of assets are exempt from this requirement and do not need to be used to deal with the hardship. These include:
- your principal residence
- a personally-operated business or farm (to a limit of $50,000)
- motor vehicles
- essential tools of trade necessary to employment
- personal items such as clothing and jewelry
This post should not be interpreted as legal advice or a legal opinion. Please consult your professional advisor to review your own particular circumstances.
© Copyright Fong and Partners Inc 2012.