The article “How Does A LIRA Work After A Pension Transfer?” was originally published on MoneySense on February 20, 2019.
Ted is confused about his investment options after leaving a DC pension, and whether his pension money would be better off in a regular RRSP.
Q: I recently transferred my pension from Bombardier to Sun Life. I completed all the documentation and expected the fund to be transferred to an RRSP “Fidelity Clear Path 2035 Port Seg Fund” with around $70,000. Instead Sun Life has put the funds into a LIRA with the same account allocations as my other investments. I am concerned as I believe the “LIRA” limits how much can be removed at any given time? I think I’m getting this confused with a life annuity? How do you calculate this? I am 54 now. Please confirm that the LIRA does not limit my access to the funds when I’m ready to retire.
A: It sounds to me, Ted, like you transferred a Defined Contribution (DC) pension plan into a locked-in retirement account (LIRA) after retiring or leaving your employer.
There are generally two options for a DC Pension when you leave. You can transfer the money into a LIRA, or you can use the balance to buy an annuity.
A LIRA is like a Registered Retirement Savings Plan (RRSP), just with some restrictions on the minimum and maximum withdrawals.
Depending on your province or territory of residence, there may be an opportunity to unlock or cash in some or all of your LIRA account, based on your age, the account value, and the reason for the withdrawal. The most common reasons you can unlock a LIRA are because there is a small balance, or because you have severe financial hardship, Ted.
In order to take continuous withdrawals in retirement, a LIRA can be converted into a Life Income Fund (LIF), a Locked-In Retirement Income Fund (LRIF), or a Prescribed Retirement Income Fund (PRIF). The type of account depends on your province or territory of residence.
LIF/LRIF/PRIF minimum withdrawals must begin by the year after you turn 71 at the latest, just like RRSP withdrawals from a Registered Retirement Income Fund (RRIF) can only be deferred until that age. Unlike an RRSP, there are also maximum withdrawals to prevent you from depleting the account too quickly.
Some DC pensions do not allow withdrawals prior to age 55, and these restrictions would also apply to a LIRA account created by a DC pension plan transfer.
As you age, the minimum and maximum withdrawals increase, and are based on the value of your account on December 31 of the preceding year.
A regular, non-locked in RRSP does not have any maximum withdrawals. Minimum withdrawals apply once the account is converted to a RRIF by as late as age 71 (with withdrawals starting as late as age 72).
An RRSP may sound more appealing than a LIRA given there are no restrictions, Ted, but Sun Life did what they were supposed to do. They can’t transfer your DC pension into a regular RRSP.
You may be able to use the funds to purchase a life annuity, which is a regular monthly payment for life that you “buy” with the money in your DC pension. When you buy an annuity, it’s like buying a Defined Benefit (DB) pension that has guaranteed payments. A DC pension, an RRSP, a LIRA, and similar investment accounts will rise and fall based on the investments they’re invested in, and the income you can draw cannot be guaranteed. Annuities, like DB pension plans, provide guaranteed income. That predictability has a cost and may not necessarily provide a higher retirement income.
Regarding the investment Sun Life put into your LIRA, it sounds like they just transferred your existing DC pension mutual fund directly into your new account.
I should point out that the 2035 fund you own is a “target date” fund that may be “appropriate” for someone retiring and starting withdrawals from their investments in 16 years, in the year 2035. At 54 years of age currently, Ted, you will be 70 in 16 years. You should consider whether the stock exposure in this fund is in line with your risk tolerance, given you are already considering withdrawals. It may (or may not be) too aggressive. Risk tolerance and investment suitability is personal, despite the generic nature of target date mutual funds.
You should also consider whether the Sun Life LIRA is the best place to invest your money, whether a LIRA with a third-party company may have preferable investment options or lower fees, or if an annuity may ultimately suit your retirement income planning needs.
Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto, Ontario. He does not sell any financial products whatsoever.