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How Locked-In Retirement Accounts Work

Your Locked-In Retirement Plan

If you’ve ever been part of a company pension plan and then left the company before retirement, you’ve likely been given one of several options.  They are as follows:

  • Leave the accumulated amount inside the company plan to be received as a pension upon retirement, or
  • Transfer the accumulated amount from the company plan to:
    • A company pension plan of a new employer,
    • An insurance company to purchase an annuity that will provide an income that replicates a pension, or
    • A locked-in retirement vehicle, which will also serve to resemble a pension when you retire.

A high percentage of our clients here at LGK Wealth Management have locked-in plans of some kind, so today we thought we’d discuss some of their features.

Locked-in accounts look very similar to RRSPs, particularly since they can essentially hold the same investments.   The main differences; however, are due to the fact that the funds in a locked in plan originate from a company pension plan, are regulated by either federal or provincial pension legislation, and are required by that legislation to be locked in (i.e. you can’t take the money out).  

The determination of whether your locked-in account is federally or provincially legislated will depend on where the company you originally worked for registered their pension plan.   If your locked in plan is provincially legislated, your account will be called a Locked-In Retirement Account, whereas if its federally legislated, it will be called a Locked-in Retirement Savings Account.

So why does the money need to be locked in?

The goal of pension legislation is to ensure that the money in these plans is preserved.   It’s meant to provide a stream of income for the retiree and his or her spouse for the remainder of their lives.   In recent years, pension legislation has loosened somewhat to allow investors to unlock up to 50% of their locked in accounts once they convert them to an income producing vehicle; however, that is a topic we’ll leave for a future article.

Similar to an RRSP, if you’re pre-retirement and you’re not in need of income from your locked-in plan, you may leave it there up to the age of 71, at which point you must convert it to an income producing vehicle, such as a Life Income Fund, or transfer it to a life insurance company to purchase an annuity.  You may also convert it to an income vehicle prior to age 71.  Of note; however, under Alberta legislation, the earliest that an individual can convert their LIRA to an income producing vehicle, such as a LIF is age 50. With federal pension legislation, there is no age restriction.

Are there occasions where I could access my locked-in account?

Whether your account is a Locked-In Retirement Account or Locked-In Retirement Savings Account, there are special circumstances where withdrawals may be allowed.  They are as follows:

  • In times of financial hardship:  Once a year an individual is permitted to apply to obtain a portion of their locked in plan if they are experiencing financial hardship.  This may be as a result of low income (legislatively defined), high medical or disability-related costs, the foreclosure on the family home, eviction for rent owed, or the first month’s rent or security deposit.
  • When you expect to have a shortened life expectancy:  If your life expectancy is considerably reduced as a result of a significant mental or physical disability, you can apply to take all of your money out of your locked in plan and transfer it to a bank or investment account.
  • If you become a non-resident:  If you become a non-resident, you may apply to the Canada Revenue Agency for a confirmation of non-residency status at which point the value of your locked-in plan will be released.
  • If your account balance is small:  Legislation varies from jurisdiction to jurisdiction; however, as of 2019, a federally legislated plan would allow an individual that is 55 or older to unlock an account that had $28,700 or less in it and receive the balance.  In Alberta, if you’re under 65, a small account is defined as $11,480 or less and if you’re 65 or older, the small account is defined as $22,960 or less.  These numbers will change slightly every year.  

Please note that most of the above reasons for unlocking require consent from your spouse, and that regardless of the reasons, all monies received from the locked-in plan are subject to income tax.

Spouses, Other Beneficiaries, and Death

When you set up a locked in retirement vehicle, you have every right to choose any beneficiary you wish; however, your spouse or common law partner may have priority over benefits regardless of the designation.  This priority may be waived if your spouse or common law partner wishes it, and provided that they sign an agreement that waives their right to the locked-in funds within the account.

When an individual passes away, the value of the plan remains locked and transfers to a locked in plan in their spouse’s name.  If there is no spouse or if the spouse has waived their beneficial rights, the money is then unlocked, and transfers to the named beneficiary.  At the same time, those funds will be taxable on the deceased’s terminal tax return.

In our next article we’ll take a look at the options available to locked-in account holders when they’re ready to convert their accounts and begin taking an income.

Please remember that many of the details regarding your locked in plans vary depending on which jurisdiction your original pension was regulated by and if you’d like further information about your pension or locked in plan, we urge you to call us at (780) 426-2400, or e-mail us at gary.koss@manulifesecurities.ca

Call 1-780-426-2400