Episode 12: Freeing those Locked-In Funds

Welcome to the Retire Ready Podcast, the podcast that helps Canadians prepare for all that retirement brings. I'm your host, Scott Sather, Founder, President, and Certified Financial Planner® at Awaken Wealth Management and Portfolio Manager with Awaken Investments of Aligned Capital Partners in Regina, Saskatchewan. Thanks for joining me.

So today's episode is about unlocking your pension plan or a Locked-In Retirement Account or LIRA, when you're nearing or ready for retirement. These accounts are governed by different rules, depending on whether they fall under federal or provincial legislation. This is a continuation from our last episode where we covered the various rules for accessing the LIRA prior to retirement. Depending on what jurisdiction the pension is regulated under, determines what options you have for accessing the funds. So we're talking more in this episode about retirement and walking through what happens when it is time to draw out those funds .

So let's first talk about why locked in accounts exist. Locked in account regulations [00:01:00] were created to protect pension money. So when you left your employer pension. The idea was simple. If people had free access to these retirement accounts at any time, some might start making unwise withdrawals or spend it all too quickly and risk not having anything left for retirement or for their families.

The rules created for LIRAs were meant to help ensure people weren't left destitute in retirement due to bad money decisions earlier in life. However, many of the rules were and are outdated and didn't take into consideration people retiring early and living longer.

So today we're gonna talk about the rules for converting your LIRA to an income type account. Your LIRA's legislation will dictate how and when you can start withdrawing from the plan. We're gonna cover a few of the provinces, mostly the ones that our clients have plans with and that we've dealt with in the past. But we'll have a full list of resources in the show notes. So be sure to check out our website, retirereadypodcast.ca, and visit the episode 12 page for all the resources. So for [00:02:00] today, we're gonna cover Saskatchewan, Alberta, British Columbia, Manitoba, Ontario, and Federal plans. Quebec and the Maritimes and the Territories will be covered in the show notes.

So think of LIRA's as the continuation of your pension, it's meant for savings. Even though once moved to the LIRA, you can no longer contribute to it. The LIRA is the equivalent of the RRSP, it's meant for the saving years. So we don't typically want to draw from our RSP as it's meant for retirement, but if you really need it, you can. Whereas the LIRA won't allow for withdrawals unless you qualify for one of the early unlocking withdrawals that we talked about in episode 11.

That's why most provinces created Life Income Funds or LIFs, Locked-In Retirement Income Funds or LRIFs, Restricted Life Income Funds , otherwise known as RLIFs or Prescribed Retirement Income Funds , otherwise known as PRIFs. Each having different rules. Originally, there weren't a lot of options your LIRA would basically move to a LIF [00:03:00] or an LRIF, you'd have a minimum that you had to take out and a maximum that you could take out each year. And then at age 80, the funds would just move over to an annuity and you'd have a monthly income for the rest of your life. So not a lot of flexibility. And when it comes to retirement , flexibility is the name of the game. These rules were put in place again to protect people from outliving those savings.

And so, sorry, I don't wanna pass by those restrictions too quickly that I just mentioned. The minimum and the maximum and the conversion to an annuity. So minimum is just like the normal RRIF, but having a maximum can definitely cramp your retirement lifestyle. You can find out more info on RRIFs and minimum payments in episode 10. Both minimums and maximums increase over time as you age, but they're always there. When it comes to the annuity, it's nice from a standpoint that you know how much you're going to receive every year or every month until you pass away, and then possibly , a percentage of what's left goes to your spouse. But [00:04:00] all the flexibility is now gone. That means if you need an extra amount to purchase a vehicle or to go on a trip, that option is gone . That's why many of the plans have started to allow for unlocking, which we'll cover as we go through the different legislation.

Most legislation requires spousal consent and in some cases the spouse to get independent legal advice to allow the LIRA to move from the LIRA savings vehicle to the RIF type income vehicle. This is just to make up for the spousal survivor benefit that would usually be paid out to surviving spouses upon the annuity or plan holder's death. So when a pension plan holder passed away, the spouse would usually get some sort of benefit. The spouse is basically signing off understanding if their spouse makes bad investment decisions or goes and withdraws it all too quickly. There may not be anything left for them when the plan holder passes away.

So let's start with the hometown pension, for me at least, that's [00:05:00] Saskatchewan. Surprisingly enough, Saskatchewan actually has one of the most flexible plans in Canada. Once you turn 55 years of age, you should be able to access your account. Although certain plans may restrict this, but most Sask LIRAs as can be moved to a Prescribed Retirement Income Fund and start to be withdrawn as early as age 55.

Once the funds are in the PRIF, they basically work just like a regular retirement Income Fund or a RRIF, there's a minimum you have to withdraw the year after you move the funds into the account and then ongoing after that. But there are no maximums, meaning you can take out as much as you want. The PRF can always get moved back to the LIRA anytime before age 71. So if you decided you wanted to stop income for a period, you can do that.

We'll continue west from here, with Alberta being the next on the list, Alberta plans move from LIRA to Locked-in Income Fund or LIF at age 50 or older. So upon converting the plan allows for a 50% unlocking, meaning you can move 50% of the LIRA to an [00:06:00] RRSP, therefore unlocking the funds. This transfer happens without any tax consequence when the appropriate forms are completed for the transfer and again, moving within those registered accounts. Again, this is a one-time transfer and cannot be done again. You can unlock less than 50%, but you can't do the transaction again, so for the sake of flexibility I always recommend, take as much as you can. The remaining 50% in the Alberta LIRA then moves to the LIF. So once in the LIF, there's no going back to the LIRA. Unlocking is not allowed if you are receiving a pension from the plan already, or if your pension does not allow for you to transfer money out of the plan because you've reached early retirement age.

Next up, we've moved to the coast before we head back east. So we'll talk about British Columbia. So BC does not allow any unlocking of funds. Funds under BC legislation move to a LIF as early as age 50 and then face those minimum and maximums for withdrawals we talked about earlier. [00:07:00] So not a very flexible plan, unfortunately.

We'll head back east now, with Manitoba being next on the list. So Manitoba allows for LIRAs or LIFs to do a one-time unlocking of 50% after age 55, but only to a PRIF. So the 50% of the fund would remain with the LIF rules of minimums of maximums, and the other 50% would go to the PRIF. With just the minimum and the ability to withdraw as much as you like. Now, back in 2021, Manitoba brought in a full unlocking rule for anyone over age 65. So this allows a 100% of the LIRA or LIF to be taken in cash, which really probably wouldn't make sense unless it's a very small balance or just transferred to an RSP or RRIF. This is nice as it means there's one less account you have to administer.

Now the last province we'll cover today is Ontario. Ontario is like Alberta in that it allows for the one time unlocking of 50% of your [00:08:00] LIRA. However, unlike Alberta, it must happen within 60 days of converting from all LIRA to a LIF, and you have to wait until age 55. If you choose to unlock, and honestly, like I said before, why wouldn't you? The remaining 50% stays in a new LIF and has a minimum and a maximum withdrawal.

The last one that's on our list that we're gonna talk about today isn't provincial, but federal. The federal LIRA could convert to a LIF or RLIF Restricted Life Income Fund. It can be moved as early as age 55. You have the ability to unlock up to 50% of the federal LIRA. And again, like Ontario, this transaction has to happen within 60 days of moving the funds to an RLIF and it's a one time thing.

One thing To remember, once your funds are locked in, they remain locked in forever and ever unless your plan legislation allows you to unlock those funds. So this means you can't combine it with a RIF or another income fund of a different legislation. You can combine [00:09:00] multiple plans if they're underneath the same legislation. So even if the original Annuitant passes away, the surviving spouse would continue with that locked in plan if it was set up with a successor annuitant. This can result in having a number of accounts that you have to follow and keep track of in retirement, and it's where a financial advisor can help for those who would prefer to delegate this.

There are some strategies that you can employ to try and get funds unlocked. For example, if your balance in the locked in plan is low enough after the unlocking of funds, you may be able to use the small balance unlocking that we talked about in Episode 11 to free up the rest of the fund. Again, each province has their own rules.

Okay, I think that covers everything for this time around. Please email us at hello@retirereadypodcast.com with any questions or ideas for future topics. Resources are in the show notes again at retirereadypodcast.com, going to the episode 12 page. Thanks again for joining me today. Look forward to seeing you back [00:10:00] on the next episode.