Pensions / LIRAs

Some jobs come with pensions. Do you understand all the options that come along with them? Pensions can be a great way to save up for your retirement, and is set up by your employer. Depending on what type of pension your employer offers, your company might match, or partially match your contribution into the account. If they do match a certain sum or percentage of money, make sure you max it out in order to receive the maximum amount of “free money”!

When it comes to employer pensions, there are two types of plans: DB Plan (Defined Benefit), and DC Plan (Defined Contribution). The DB Plan gives the employee the security of knowing what to expect at retirement. Your income is specified closer to retirement, based on a formula stated in the plan. The formula has to do with your final salary. The employee contribution is set to a fixed amount. Although the employer doesn’t match the amount put into the account, they are responsible to add as much as necessary to provide the promised benefits. A few scenarios where it could be beneficial to have the DB plan are: if you were hired mid career and plan on staying until retirement, longer life expectancy, and/or you are an employee with significant pay increases. The DC Plan is a plan that you invest in. Your employer specifies how much will be contributed to the plan on a regular basis, and will match a certain amount of that. The amount received during retirement is based on an amount invested, and the performance of the invested funds over time. The amount invested into the fund by you and employer is at a set amount. This could be a good plan if you make a consistent level of income over your career, or plan on leaving the company at a young age.

Your pension is put into an account called a LIRA (Locked-in Retirement Account). LIRAs are very similar to RRSPs but with restrictions. At the age of 71 it is mandatory that your LIRA be converted to a LIF (Locked-in Fund), or a Life Annuity. To take money out for your LIRA it has to be converted to a LIF, or annuity. There is a minimum and maximum amount of money you take out of your account every year. The minimum age to start receiving funds from the account is 55 years of age. Once you make this decision to convert your LIRA to a LIF you are stuck with that decision, it’s nonreversible. You cannot contribute to the account with your own money, it has to be contributed by your employer. A LIRA, just like its name states, is an account that is “locked in” and cannot be touched by the account owner (without certain circumstances). If you are leaving your place of work your options are usually to keep it in the pension and collect the pension benefits at the time of retirement, move it to a life annuity, or move it to a new pension (if the new pension allows you to).

If you are in need of money in your locked in account, there are a few things to know that may help you “unlock” your account. You are allowed to unlock part of your account if you are having financial hardships: low expected income, first and last month’s rent, medical, or to help pay off your mortgage. After you transfer from a LIRA to a LIF you have a 60 day period where you can either transfer 50% of your money into an RRSP or just draw the money from a LIF. If you choose this option, the money is considered taxable income for the year. If you transfer to a RRSP, you will receive a contribution receipts which will offset the transfer amount. If you are no longer a Canadian resident, and have been out of the country for 24 months or more than you are entitled to take money out of your LIRA. Lastly, if you are at least 55 years of age and your total value of all money held in every combined Ontario LIRA are less than $21,000 you can apply to withdraw or transfer all the money in the account! For additional information on unlocking the funds please visit: http://www.fsco.gov.on.ca/en/pensions/Forms/Pages/default.aspx.

If you have been offered a pension at work and you have any questions, contact one of us.


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