What’s the difference between LIRAs, LIFs and life annuities?

What’s a LIRA for?

A locked-in retirement account (LIRA), similar to a Registered Retirement Savings Plan (RRSP), allows you to save money tax-free until you retire. It differs from an RRSP in that you can neither contribute nor withdraw money from it – with certain exceptions. It’s mainly used to transfer sums accumulated in a previous pension plan or fund, but only in certain circumstances.

Under what circumstances can a LIRA be opened?

You can open a LIRA if one of the following situations applies to you:

• You change jobs and decide to transfer the money accumulated in your former pension plan to a LIRA.
• You’re entitled to the money in your former spouse’s pension plan as part of a division of assets. This could happen in the event of divorce or death, for example.

What’s the difference between a LIRA and a locked-in RRSP?

You can invest funds from most pension plans in a LIRA. The only exception is if it comes from an organization under federal jurisdiction, such as the public service. In this case, you’d have to open a locked-in RRSP.

A locked-in RRSP differs from the LIRAs offered by each province. The main difference between these two accounts is the accessibility of funds and their disbursement. For example, if your spouse dies and you receive money from their federal pension plan, that money will be frozen in a locked-in RRSP or a life income fund (LIF). But if the money comes from a provincial pension plan, in most cases it won’t be locked in.

Can you access the money in your LIRA before you retire?

If you want to withdraw money from your LIRA before you retire, you need to either open a life income fund (LIF) to transfer the money, buy a life annuity or combine these two options. Here are the three possible scenarios:

First option: A life income fund

A LIF works in a similar way to a Registered Retirement Income Fund (RRIF): your money remains tax-sheltered until it’s withdrawn. This type of account is more restrictive since it’s subject to the following conditions:

• Each year, you must withdraw a minimum amount from your LIF at a frequency of your choice. This amount varies according to your age and is calculated in the same way as the minimum annual RRIF withdrawal.
• In most provinces, LIFs are subject to a maximum annual withdrawal limit that varies according to your account balance and age. This makes it impossible to predict exactly what this limit will be from one year to the next.
• If you live in Quebec and are aged 55 or over at the time of the application, there will be no maximum withdrawal limit as of January 2025.
• Upon your death, the balance of your LIF will first go to your spouse.

Second option: A life annuity

You don’t need to convert your LIRA into a LIF – you could also opt for a life annuity. Like a LIF, this annuity is designed to provide you with regular income throughout your life. There are some key differences between these two investment vehicles:

• A LIF gives you the opportunity to choose the type of investments you want and offers greater flexibility in terms of the amount you can withdraw.
• Once a life annuity has been set up, the amount remains the same for the rest of your life. This sum is guaranteed for life and cannot fluctuate according to the volatility of the stock markets or interest rates.

Third option: A combination of the two

You could also choose to convert part of your LIRA into a LIF and the other part into a life annuity.

Regardless of the option you choose, you need to convert your LIRA or locked-in RRSP into a LIF or life annuity no later than December 31 of the year in which you turn 71.

Can you make direct withdrawals from your LIRA before you retire?

Yes, but in very specific situations.

For example, if you suffer from a serious illness that shortens your life expectancy or if your income is modest, you may be able to access this money earlier. Remember that the rules differ from province to province.