What Are they?

A LIRA is a Locked-In Retirement Account and a LRSP is a Locked-in Retirement Savings Plan. Other than the name, there isn’t much in the way of a profound difference in either. Both are designed to receive the available commuted proceeds from your registered pension plan, acquired through your employment with an employer sponsored pension plan. The investments you can make in a LIRA or LRSP are the same as what you can invest in through your RRSP.>

What is the fundamental difference between Pension Savings and Registered Retirement Savings?

The answer to this question should help you both understand what you can do with Pension Savings, and why Pension Savings is different. Pension Savings is a contractual arrangement between you and your employer, to provide you with monetary support in accumulating retirement income assets. Whether your employer chooses to employ a Defined Benefit, or a Defined Contribution Plan approach, they are making a commitment to your financial well-being. This commitment to your future well-being extends to what you can do with Pension Assets. Pension money is designed to be available for the entirety of your life and provide a Lifetime Income. You have very little control over the distribution of this money.

Conversely, Registered Retirement Savings Plan money is yours to control. Other than the obligation to pay tax upon withdrawal, there are very few restrictions as to what you can do with RRSP money.

What can I do with Pension Money?

Transferring your Pension Savings into a LIRA or a LRSP labels this money as pension assets and establishes the legal requirements that all financial institutions must follow.

As this is Pension money, it is subject to the applicable Federal or Provincial legislation that governed your pension plan, and establishes whether a LIRA or LRSP can receive your pension assets. Every jurisdiction in Canada allows for either the Market Value of your Defined Contribution Pension Plan or the allowable commuted value of your Defined Benefit Pension Plan to be transferred into either a LIRA or LRSP. If your pension money is in a Defined Contribution Pension Plan, then the calculation of what can be transferred is whatever the balance or Market Value is at the time you transfer the money.

For a Defined Benefit Pension Plan, one where the amount of income you will receive at a future date or age is stated in writing, the available amounts to transfer is more complicated.

The Income Tax Act (Canada) may limit the amount of your commuted value that can be transferred out to one of the options above. If that limit affects your transfer, then the excess amount above the tax limit, will need to be paid to you in cash, subject to withholding tax, and will be included in your taxable income for that year. You may have the ability to transfer this amount to a non-locked-in RRSP if you have sufficient contribution room.

For a Defined Benefit Pension Plan the calculation of commuted values is not a linear calculation. It takes into consideration the financial health of the pension plan, current interest rate and return assumptions, whether the Pension Plan has a surplus or a deficit, is the plan part of a multi-employer pension plan, and your age. The governing body that controls the pension plan may in fact restrict all transfers out of any commuted values.

May I withdraw money from a LIRA or LRSP?

The answer is a qualified, yes. The different jurisdictions have a variety of rules and exceptions. See LIRA and LRSP Withdrawal Rules.

There are enough nuances in transferring pension assets, that the input of a qualified financial advisor should be engaged. Whether it makes financial sense to transfer this money, should be weighed against the available guarantees that a pension plan offers, versus the perceived benefit of controlling your investments. This caution is particularly compelling if you have a Defined Benefit Pension Plan.

If you’ve gone this far in your exploration of this idea, perhaps now is the time to speak to a qualified advisor?

May we invite you to give us your contact information, so that we may continue the conversation.