As Canadians stare down the possibility of costly U.S. tariffs, politicians and pundits have begun calling for Canada to address its interprovincial trade barrier problem. Most often, these barriers take the form of regulatory differences between provinces that make it difficult to do business in multiple jurisdictions.
Personal finance is not immune to these irritating and unnecessary interprovincial differences. Meet Locked-in Retirement Accounts (LIRAs) and Locked-in Retirement Savings Plans (LRSPs).
In general, a LIRA is created when an employee leaves a job where they were a member of a pension plan and elected to “cash out” the value of their investment in the plan. LIRAs are subject to provincial jurisdiction.
LRSPs are similar, except that they exist where the employee worked for an employer under federal jurisdiction.
It is hard to say exactly how common these accounts are. Statistics Canada reported that, in 2022, 37.5 per cent of the workforce were members of a registered pension plan. Financial advisors I spoke to estimated that between 10 and 20 per cent of their clients had investments in LIRAs or LRSPs.
Arguably, LIRAs and LRSPs are unnecessary because they are so similar to RRSPs.
Like RRSPs, amounts withdrawn from LIRAs and LRSPs are considered taxable income. The types of investments these accounts are permitted to hold are identical. Like RRSPs, which must be converted to RRIFs at age 71, LIRAs and LRSPs must also generally be converted to analogous accounts at certain ages and are then subject to minimum withdrawal rules.
The differences that do exist between LIRAs and LRSPs and RRSPs are trivial and merely create costs for account holders.
For example, unlike funds in an RRSP, which can be withdrawn at any time, the funds in a LIRA or LRSP are “locked-in,” meaning a withdrawal is highly restricted.
There are some exceptions to these lock-in rules, however, which vary based on provincial and federal legislation.
The Canadian Bar Association, a national legal organization, created a comparison chart of these rules for a 2021 submission to the Saskatchewan legislature, when the province was considering updating its rules.
The chart highlights the slight distinctions between each jurisdiction, which generally permit early withdrawals for medical expenses, housing expenses or low-income account holders.
Let’s look at a withdrawal for permitted medical expenses. How much can you withdraw? For an Alberta LIRA, it is the “Amount required to cover expenses for the 12 months following submission of application.” Nova Scotia is more generous, allowing the “Amount required to cover expenses for the 12 months prior to and 12 months following submission of application.”
Ontario has a rule only a lawyer could love. Its limit is the “Lesser of a) 50% of [Yearly Maximum Pensionable Earnings], and b) medical expenses already incurred and expected to be incurred in 12 months after application made.”
These different rules exist because LIRAs and LRSPs are governed by employment laws, which fall under provincial and federal jurisdiction. And the “locking-in” regime was presumably implemented to ensure LIRAs and LRSPs serve the goal of providing income in retirement.
But the multiplicity of rules — and lack of flexibility they create — do not benefit account holders.
To the contrary, Canadians waste untold dollars and hours trying to navigate these rules themselves or paying financial advisors, lawyers and accountants to do so on their behalf.
Fortunately, there is an easy fix for this situation. All provinces could simply adopt the federal LRSP legislation and eliminate their own LIRA regimes.
However, even this step would only be a half measure. Better yet would be to do away with all LIRAs and LRSPs entirely. Any existing such funds could be placed into new or existing RRSPs.
Unlike LIRAs and LRSPs, RRSPs are widely understood by Canadians and the financial advisory community. They are flexible. Withdrawals can be made at any time for any reason without having to plead the proper form of poverty to a financial institution or regulatory authority.
While RRSPs can and largely are used to save for retirement, they are a flexible account type that can be adapted to the varying needs of Canadian families. They can be used to save for a parental leave or career break. They can be used to smooth earnings for individuals with lumpy incomes. They allow individuals to borrow funds for home purchases and education.
In short, RRSPs give Canadians a dynamic account that allows them to better control the timing and use of their own money.
Let’s trust Canadians to know and understand their own financial planning needs. Eliminate LIRAs and LRSPs to simplify the lives of all Canadian savers.
I have a lira account from government employment. I retired recently and have reached 71 so am withdrawing from it. The process is uncomplicated.
Thanks for sharing your experience. I’m happy it went smoothly for you.
Your experience would likely have been similarly smooth if you had your funds in an RRSP.
LIRAs become complicated if your needs in life change. Perhaps you want to go back to school or buy a house. Your LIRA funds would not have been available to you.
Also, I’m assuming you have converted your LIRA to a LIF. Note that your LIF may have maximum withdrawal limits (unlike an RRIF).
Great article and, as an Investment Advisor, I agree that the rules should be simplified; however, I disagree with your one comment “Let’s trust Canadians to know and understand their own financial planning needs”. Sadly, some don’t. These few individuals will drain their RIF & LIF holdings quickly to meet current whims and leave future necessities to chance (i.e. the lottery they are sure they will win if they buy enough tickets). This is why limits are placed on withdrawals. Employers want to safeguard the future of their former employees. The alternative would have been a guaranteed pension which is far more restrictive than a LIF.
Hi Sharon,
Thanks for your comment. As an advisor, I’m sure you’ve seen all kinds of different situations so I value your perspective.
I agree that some individuals may not save responsibly. One counterpoint is that we have CPP, which cannot be commuted. So we do have some backstop for folks who were employed but may not have saved well. Also, CPP is being expanded for individuals with incomes up to 80,000, so we will see higher CPP payouts for those people in the future.
I also suspect that employers are likely indifferent to the retirement of non-plan members. The withdrawal limits are set by governments rather than former employers.
Overall, I continue to believe that the LIRA regime should be scrapped entirely rather than reformed, but I do acknowledge your very valid concerns.
Chetan